TORONTO (AFX) - Fairfax Financial Holdings Ltd. is seeking $5 billion in damages from a group of big hedge funds led by SAC Capital Management, claiming the funds spearheaded a 'massive and fraudulent disinformation campaign' against the Canadian insurance company to profit from shorting its stock.
Fairfax alleges that SAC, along with a number of other hedge funds, shorted Fairfax stock and then carried out an 'organized effort to damage severely, if not destroy, Fairfax and its affiliated companies by among other things (spreading) false and misleading information about Fairfax's business to its employees, executives, shareholders, bankers, regulators and rating agencies.'
By shorting, investors make money if the stock price falls.
Fairfax, which is based in Toronto and has operations both in Canada and the U.S., filed the lawsuit with the Superior Court of New Jersey, Morris County.
The lawsuit comes at a time when hedge funds are coming under increasing scrutiny by companies and regulators. For instance, last month a number of witnesses told the U.S. Senate Judiciary Committee that fraud and manipulation in the hedge-fund industry is on the rise.
A spokesman for SAC couldn't immediately be reached for comment on Fairfax's suit. But SAC, a $7 billion New York hedge fund headed by well-known investor Steven Cohen, is already the subject of a similar lawsuit.
In February, Biovail Corp., a Canadian pharmaceutical company, filed a $4.6 billion lawsuit with the Superior Court, Essex County, N.J., against SAC and several other hedge funds. Biovail alleged the hedge funds carried out a 'massive, illegal and continuing stock market manipulation scheme, which targeted and severely harmed Biovail' and resulted in 'immense ill-gotten profits for SAC Capital and other extremely powerful hedge funds.'
A Biovail spokesman couldn't immediately be reached for comment on the status of the suit.
Fairfax and Biovail have long been targets of short sellers because of controversies surrounding their operations. The Securities and Exchange Commission has been investigating Biovail's accounting practices since November 2003.
In April, Fairfax said that a class-action lawsuit had been filed against it in the U.S. District Court for the Southern District of New York on behalf of some of its debtholders. The defendants allege that Fairfax failed to disclose certain material information about its financial condition in connection with the sale of the company's debt securities. In addition, the SEC has been probing Fairfax's use of unusual reinsurance policies as part of an industrywide investigation into these types of transactions.
In addition to allegedly spreading misleading information to Fairfax and the public markets, the company claims that the defendants engaged 'in a long-term campaign of personal harassment of present and former employees, executives of Fairfax, including personal attacks delivered to executives' clergy and family members.'
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