Fairfax chief executive Prem Watsa, known for his value investments and bearish view of the North American economy, is also an investor in, and board member of, Blackberry Inc. (formerly Research In Motion, Ltd.), which the criminal indictment claims was one of the companies SAC employees traded using insider information.Aaron Harris/Reuters
Criminal charges filed against U.S. hedge fund SAC Capital Advisors LP by federal prosecutors could invigorate Fairfax Financial Holdings Ltd.'s lengthy legal battle with the firm and its wealthy founder, Steven Cohen.
On Thursday, a grand jury charged that the insider trading at SAC was "substantial, pervasive and on a scale without known precedent in the hedge fund industry." The move calls into question the future of the aggressive and well-known hedge fund SAC. But for Toronto-based insurer and investment manager Fairfax, the indictment in some ways vindicates its long and high-profile battle with the company.
"Seven years ago Fairfax sued SAC, alleging it was a criminal enterprise engaged in systemic insider trading and other misconduct," said Fairfax's lawyer, Michael Bowe of Kasowitz Benson Torres & Friedman LLP. "Today, after a wide-ranging and relentless seven-year investigation, numerous SAC employees have been arrested and the company has been indicted."
Fairfax chief executive Prem Watsa, known for his value investments and bearish view of the North American economy, is also an investor in, and board member of, Blackberry Inc. (formerly Research In Motion, Ltd.), which the criminal indictment claims was one of the companies SAC employees traded using insider information.
Fairfax was one of the first public companies to come out against Stamford, Conn.-based SAC in 2006 when it launched a $6-billion lawsuit in New Jersey against a group of hedge funds. Fairfax alleged the defendants conspired to drive down its stock price, and alleged specific examples of illegal trading by SAC and other hedge funds. The scheme involved synchronizing short positions with negative analyst reports, according to Fairfax's allegations, which caused a stock drop of close to 70 per cent between 2001 and 2003. (Fairfax's stock price later rebounded.)
The allegations have not been proven in court. SAC Capital and the other defendants denied the allegations.
In September, 2011, a New Jersey superior court judge ruled in favour of SAC and dismissed Fairfax's complaint in a way that didn't allow the lawsuit to be refiled. In fact, all of the hedge funds that Fairfax sued won dismissals.
Fairfax hasn't given up. It waited until May 31 this year to file its appeal, asking the courts to allow it to proceed with its lawsuit against SAC, as well as the other short sellers, on the grounds that the trial court made four key errors when it decided that Fairfax had no legal remedy.
By that time, SAC was already feeling the heat of the insider trading investigations by the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation. Several media outlets charted redemptions from SAC's major hedge funds that numbered in the billions.
The criminal indictment of the hedge fund could make Fairfax's appeal more persuasive. And the charges, let alone a possible conviction, could make winning a trial more challenging for SAC – provided Fairfax's appeal is successful.
"Fairfax is confident its claims against SAC will soon be reinstated and it will try its claims against a criminally convicted SAC," said Mr. Bowe.
Fairfax executives declined to comment.