The Inside Story of a Wall Street Battle Royal

No, it's not a crime novel but the tale of insurance giant Fairfax and its CEO's crusade against some very powerful hedge funds. Is it a quest for justice or an attempt to silence critics? Fortune's Bethany McLean investigates.

By Bethany McLean
Fortune Magazine editor-at-large
March 6, 2007

July 26, 2006: Canadian insurer Fairfax Financial Holdings sues a group of hedge funds and research analysts for $5 billion in New Jersey state court, alleging a stock market manipulation scheme in which the funds sold Fairfax's shares short, got analysts to write negative research reports that pushed the stock down, and made fortunes. The list of some 20 defendants ranges from market wizard Steven Cohen, the ultraprivate multibillionaire who runs the $12 billion hedge fund SAC Capital, to the previously obscure Spyro Contogouris, who, according to the lawsuit, is an "operative for short-selling hedge funds that pay him to drive down the price of stocks."

Nov. 14, 2006: The U.S. Attorney for the Southern District of New York announces the arrest of Spyro Contogouris. An affidavit filed by FBI agent B.J. Kang accuses Contogouris of "systematically defrauding" a Greek businessman of at least $5 million from 1997 to 2002. The charges are unrelated to Fairfax, but the company's stock soars 10 percent on the news, and its lawyer, Marc Kasowitz, says the charges "don't surprise us, given Fairfax's own claims against Mr. Contogouris and others for being engaged in a racketeering conspiracy."

Dec. 12, 2006: Carlos Mendez, a former Naval officer who is now a senior partner at Institutional Credit Partners, which manages a multibillion-dollar fixed-income portfolio, had complained to an FBI agent he knew that someone was following ICP's employees. He gets a call from the agent asking him to come in. When he arrives, an agent he's never met, B.J. Kang, greets him with some abrupt questions. "What hedge funds do you work with?" he asks. And then: "Why is Marc Kasowitz interested in ICP's employees?"

The story of Fairfax, which had $6.8 billion in revenues last year, has more twists and turns than "The Departed." It reaches from the trading floors of some of the world's most powerful hedge funds to the offices of the FBI to havens of corporate secrecy like Bermuda, Luxembourg and Hungary. It involves financial machinations so complex that obfuscation seemed to be a business strategy, and the question isn't only whether the machinations are legal but whether anyone can even figure them out.

This isn't just another squabble between short-sellers and their targets. If Fairfax and its CEO, Prem Watsa, are right - and some people believe they are - then greedy hedge funds are trying to bring down an innocent company, ripping off small investors.

Fairfax alleges that the defendants "engaged in an organized effort to destroy Fairfax" and have "reaped immense, ill-gotten profits." The allegations tap into fears about the secrecy and power of hedge funds and how they may use analysts and, yes, journalists to manipulate the market. Watsa insists that his lawsuit is not a referendum on short-selling - "I short stocks," he says - but rather about stopping a "smear campaign."

Fairfax's suit claims that short-selling schemes have "targeted many dozens, if not hundreds, of other publicly traded companies." Last spring Kasowitz testified at a Senate Judiciary Committee hearing on the relationship between hedge funds and analysts, describing a "pervasive pattern of market manipulation" on the part of "certain extremely powerful hedge funds."

Reinsurance: Risky business

But there is also the distinct possibility that Watsa and his company are not, in fact, victims - in which case the story is perhaps even more disturbing. After the last round of corporate scandals, regulators and the public cried out for more hardheaded analysis. Where were the skeptics, they asked? Now, just a few years later, there are skeptics aplenty about Fairfax, and they have taken their suspicions to regulators, rating agencies and others.

But it appears they have been muzzled by a blunt instrument-litigation. "This is clearly an improper effort to silence perceived critics of the company," says David Zensky, a lawyer at Akin Gump who is representing defendant Exis Capital Management. "It's bad for the market, and it's a bad precedent." (All the parties Fairfax is suing either denied wrongdoing or declined to comment.)

Nor is Fairfax the first to use this new tool. Overstock.com and Biovail (also represented by Kasowitz) have brought similar suits. The suits are in their early stages, but a California court recently allowed the Overstock.com case to proceed. That ruling was troubling to those who believe critical analysis is vital to the markets.

Of course, it's also possible that the truth resides in an uncomfortable place somewhere in the middle. Fairfax's lawsuit is stuffed with unsavory allegations that Contogouris and others "engaged in a long-term campaign of personal harassment" of Watsa, his family members and others connected to the company.

But even such misconduct wouldn't mean that questions the skeptics raise aren't valid. Questions of financial impropriety are especially troubling at an insurer, where they can harm not only investors but also the policyholders who are counting on the insurer in case of disaster. And now, if an investor or policyholder were to seek help answering those questions, he or she would find only silence. Or rather, mostly silence.

The Warren Buffett of Canada

Today there's a Rashomon-like quality to the Fairfax story, but that wasn't always the case. Watsa began creating the sprawling company now known as Fairfax Financial Holdings in 1985. Fairfax - the name stands for "fair, friendly acquisitions" - was a phenomenal success, with a stock that soared from about $3 in 1985 to a high of over $600 in 1999 (all the figures in this paragraph are in Canadian dollars).

Watsa was called the "Warren Buffett of Canada." But unlike Buffett, Watsa built his empire via progressively larger acquisitions of troubled property and casualty insurers. It was risky, because if you buy insurers that have done a bad job of underwriting, losses can snowball for years. That's what happened at Fairfax.

In the late 1990s the Toronto-based company bought companies like Sphere Drake, which had operations in London and Bermuda and had exposure to asbestos claims, and the U.S.-based TIG, which had big workers' compensation claims. Watsa had to increase Fairfax's reserves repeatedly and put some of the European businesses and, eventually, a large part of TIG into "runoff," meaning they stopped writing new business and merely paid claims on existing policies.

In 2001 - partly because of claims from the destruction of the World Trade Center - Fairfax lost more than $300 million. By late 2002 its stock had fallen to $115, and the rating agencies had downgraded its debt to junk, a rating it carries today. By March 2003, Fairfax had just $210 million of cash on its balance sheet, far less than rating agencies want to see at a company of its size. (At the end of 2002 Fairfax began trading on the New York Stock Exchange; at the end of 2003 it began reporting its results in U.S. dollars.)

Watsa had another problem: short-sellers - investors who borrow shares and sell them, hoping to buy them back at lower prices in the future, betting the company's stock price will fall. To the shorts Fairfax looked as if it were headed for serious trouble, if not bankruptcy. By early 2003 more than two million Fairfax shares were sold short.

In conference calls and annual meetings, Watsa assured investors that he was taking steps to fix Fairfax's problems. He remained upbeat, describing results most quarters as "excellent" or saying that he was "very pleased." In general, even a troubled insurer can avoid collapse for a long time if it can sustain the confidence of the market and keep cash coming in the door.

But the company continued to struggle. What money Fairfax made came from investing activities. As any student of Buffett knows, insurance companies get most of their profits by investing policyholder premiums. And Watsa seems to be a superb investor. Over the seven years through 2005, Fairfax booked $2 billion in investment gains, and another $3 billion in interest and dividends.

But Fairfax has also been hit with huge claims from events like the Gulf Coast hurricanes, and the losses from operations that Watsa put into runoff have continued - in 2005 they totaled more than $600 million (before taxes). On a conference call in early 2006, Watsa conceded that "over the past seven years, on a cumulative basis, we have barely been profitable."

Short-sellers and other skeptics argued the situation was even worse. Fairfax's reserves still weren't adequate, they claimed, and the company's heavy use of a controversial product known as finite reinsurance (the same product whose abuse would result in the indictments of former executives of both AIG and General Re in the fall of 2006) was artificially boosting Fairfax's earnings while camouflaging the amount of its leverage. And they complained about indecipherable transactions among offshore affiliates. The critics said Fairfax was so weak that it would not be able to pay all its claims.

Fairfax makes its case

In a visit to Fortune's offices last fall, Watsa, a soft-spoken, gentlemanly figure, was accompanied by Fairfax vice president Paul Rivett, Kasowitz and Mike Sitrick, a public relations consultant with a reputation for aggressive tactics. (His Web site features press clippings saying things like Sitrick is "the PR guy you want in your corner if you want to play hardball with the media.") Watsa said he was surprised to find himself with both a lawyer and a PR man. For years he avoided the press, never gave guidance on earnings, and catered only to long-term investors. He cites "honesty and integrity" as Fairfax's core values and said that he had always believed, "Put your head down and the results will out."

The way the Fairfax executives told the story, Fairfax's poor performance was not what attracted the short-sellers. Rather, "They saw us as an easy target," Rivett said. "We don't talk to the media, our stock is thinly traded [meaning a relatively small number of shares change hands each day, making it easier to manipulate the price] and this is a reputational business."

Rivett said short-sellers started the "Fairfax Project" on Jan. 16, 2003, when John Gwynn, a research analyst at regional broker Morgan Keegan, released a report estimating that Fairfax's loss reserves were $5 billion smaller than they should be. Fairfax promptly issued a press release calling the report "totally wrong."

Even so, over the next few trading days Fairfax stock fell some 20 percent. A few weeks later Gwynn corrected his math, saying that the number was actually $3 billion. In the view of the Fairfax camp, Gwynn hadn't simply made a big mistake - rather, his report was an "intentional attempt to cause a massive stock price drop." (Gwynn and his firm are defendants in the lawsuit.) Fairfax says the $3 billion figure was also wrong, but between 2003 and 2005, Fairfax increased its reserves by $1.4 billion.

Because the hedge funds knew the contents of the report before its public release, Rivett said, they were able to make a killing - but they weren't done. The hedge funds kept "substantial" short positions and then, Rivett says, they couldn't get out. He is alluding to a market phenomenon known as a short squeeze. Because fewer than 16 million of Fairfax's shares trade, if a short-seller were to purchase shares to cover his position, that demand for the stock could quickly push the price higher. If shorts all began buying at the same time, the stock could soar. Thus, said Rivett, the only way the conspirators could get out of their positions was by sending Fairfax's stock to zero using an "ambitious campaign of disinformation and dirty tricks."

Insurance companies take on global warming

The hedge funds that Watsa says victimized Fairfax are a Who's Who of the industry, and many have connections to one another. There's SAC and Exis Capital, run by Adam Sender, who used to work at SAC. Third Point and its colorful CEO, Daniel Loeb, are defendants, as is a Third Point analyst, Jeff Perry, who used to work at SAC. But of all the people Fairfax sued, it reserved particular vitriol for Spyro Contogouris, conspicuously not a member of the Wall Street elite.

Contogouris, 45, splits his time between New York City and New Orleans, and his background is not in high finance but real estate - he managed properties for a Greek family with whom he eventually became embroiled in a lawsuit.

After New York attorney general Eliot Spitzer eviscerated Wall Street research, Contogouris went into business as an independent research analyst. He proved himself by writing critical reports on what officials have now alleged was a Ponzi scheme involving stamp collecting and eventually acquired about a half-dozen clients for his firm, which he called MI4 Reconnaissance.

When the insurance industry came under scrutiny in late 2004 thanks to Spitzer's investigation of industry giant AIG, Contogouris began to search for other companies that might have run afoul of the complex insurance accounting rules. He quickly zeroed in on Fairfax. In notes to clients Contogouris raised questions about Fairfax's use of finite reinsurance, as others had.

On Sept. 7, 2005, Fairfax announced that it had received a subpoena from the Securities and Exchange Commission regarding its use of "nontraditional insurance and reinsurance." Later that month Fairfax disclosed another SEC subpoena and said that the U.S. Attorney for the Southern District of New York was also participating in the review. Watsa reassured investors, telling them that "we have had a full review by us and by our independent auditors" and that all that turned up were several small contracts at its partly owned, publicly traded subsidiary, Odyssey Re.

But in March 2006, Fairfax announced that both the company and Watsa had received additional subpoenas regarding his reassuring comments, and that its auditor - PricewaterhouseCoopers - had also been subpoenaed. Fairfax's financial statements warned that "the ultimate effect on its business & could be material and adverse." On conference calls Watsa puts the subpoenas in the context of the industrywide investigation into finite reinsurance but otherwise declines to comment. Credit-rating agency Moody's says it is "comfortable" that "any adverse regulatory developments will be manageable."

Foreign intrigue

Contogouris and an associate, Max Bernstein, traveled around the world unearthing Fairfax financial documents. These papers provided tantalizing information on transactions that sent preferred shares - that were supposedly worth hundreds of millions of dollars - back and forth among a dense web of Fairfax subsidiaries in places like Ireland, Bermuda, Gibraltar and Hungary, where the disclosure requirements are limited.

Here's an example of the type of activity Contogouris and Bernstein highlighted for their clients. Start with a Fairfax subsidiary called nSpire Re, which is based in Ireland. Fairfax's documents say it reinsures the U.S. operations, is responsible for the claims of the European runoff and provided much of the financing for the acquisition of Fairfax's U.S. operations. Financial statements show that in 2004 and 2005, a company called Fairfax Liquidity Management Hungary sent nSpire Re more than $1.6 billion of dividends in the form of preferred shares in two other companies - Fairfax (Gibraltar) and FFHL (Bermuda).

In a presentation to Fortune, Fairfax executives explained that Fairfax used transactions like the one above as part of a strategy that was originally designed to reduce taxes. They explained that in essence, Fairfax's Hungarian subsidiary lent money to Fairfax Inc., the U.S. operation, to finance acquisitions.

As a result, the U.S. operations paid interest to Hungary, which had a lower tax rate. Over time the structure morphed; at one point Hungary owned 62.5 percent of the equity in the U.S. operation and was owed repayment of a $500 million loan. Fairfax will not disclose how much this arrangement increased its already large tax credits. Nor was Fortune allowed to keep a copy of the presentation.

Fairfax supporters aren't troubled by the company's complexity. "They [Watsa and his team] are incredibly smart people who think this is a good way to structure a company," says Joyce Sharaf, an analyst at credit rating agency A.M. Best. Robert Dye, a portfolio manager at Regis Management who bought shares in Fairfax in the spring of 2006, says, "I made the decision to believe Watsa and [Fairfax CFO] Greg Taylor."

Dye calls Fairfax's practices "creative" but says that the short-sellers have "tried to exploit" this. Fairfax's Rivett says this structure is "not unusual," that rating agencies, shareholders and other journalists have not found it "any more complicated" than that used by any other multinational company, and that it "had no impact on Fairfax's consolidated financial statements apart from the net tax savings realized."

Yet these internal dealings still raise questions. Insurance companies like to keep their subsidiaries separate so that trouble in one does not affect the whole. Both policyholders and bondholders are entitled to specific pots of money. Fairfax's financial statements say it does not engage in the "cross-collateralization by one group company of another group company's obligations." But Fairfax's subsidiaries are intertwined via loans and the stake that nSpire Re holds in the U.S. business. For example, the U.S. operation has sent well over $500 million to nSpire Re, at least some of which was used to pay claims in the European business.

In addition, the stake in the U.S. operation has been pledged to support Fairfax lines of credit. For instance, Hungary swapped its stake in the U.S. operation for preferred shares in Fairfax Gibraltar. In 2003, Gibraltar was pledged as collateral for a Fairfax line of credit, which, Fairfax says, the parent company used to back letters of credit. Rivett says that the letters of credit were not off-balance-sheet financing because Fairfax's financials disclose that letters of credit were issued to back internal reinsurance obligations. "I cannot say strongly enough that there has not been, and there will not be, any off-balance-sheet financing" in this structure or otherwise, says Rivett.

Buying into crisis: Investing in insurance

The biggest question, though, surrounds the cash. According to the presentation given to Fortune, the U.S. operations have paid roughly $1 billion in interest and loan repayment to the foreign subsidiaries. It's not clear where the U.S. operations got all this cash. (Fairfax says it came from interest income, dividends and the proceeds of a bond offering by one of its U.S. companies, but will not provide more detail.)

And Fairfax's explanations still don't account for all the cash that it says moved through the overseas subsidiaries. Its lawsuit also says that nSpire Re paid Fairfax a $500 million dividend. That fact was not in the presentation given to Fortune. When asked about this transaction, Rivett would only say that "further information & will be provided as the lawsuit progresses."

Contogouris, who found the documents that shed some light on this, had his own theory. He thought that Fairfax had found a way to circumvent insurance regulations and inappropriately use policyholder cash from the U.S. to pay losses elsewhere. Fairfax then replaced that cash with what he called "fake" preferred shares "to trick policyholders, insurance regulators and investors."

He conceded that he couldn't connect all the dots. As he wrote in one note, "We do work based on speculation, and last I checked, it wasn't illegal." But he didn't leave much doubt about what he thought. "Fairfax," he wrote in one note, is the "greatest known insurance fraud of the 21st century."

Fairfax says that Contogouris's theories are "groundless and defamatory." Rivett and Kasowitz argue that Contogouris's past discredits him - and the hedge funds he worked for. "No jury will believe these highly sophisticated hedge funds were paying this individual for his investment advice," says Rivett.

Fairfax also alleges that Contogouris misrepresented himself, stalked its executives, and sent threatening e-mails to Watsa and his secretary from anonymous accounts. Contogouris's lawyer, Joe Tacopina, calls these accusations "totally false."

One episode that Fairfax cites as evidence of Contogouris's misconduct occurred last summer, when Contogouris contacted a former Fairfax CFO, Trevor Ambridge, asking him in an e-mail about the "seemingly incomprehensible inter-company asset movements." He also told Ambridge he could introduce him to someone who would "act as a liaison to current regulators."

Truth be told, Contogouris is something of a mystery. In September the New York Post reported that he was working for the FBI when he contacted Ambridge - and that an FBI spokeswoman confirmed the FBI connection. The FBI says it asked the Post to retract the statement that an FBI spokeswoman had confirmed Contogouris's role but will not comment on whether it had a relationship with Contogouris.

Fairfax fights back

On July 26, 2006, Fairfax filed its lawsuit alleging stock manipulation. But if there was a "Fairfax Project" to sink the stock, it hadn't been very successful. At the time the lawsuit was filed, Fairfax's stock was at about $115, more than double its lows from the spring of 2003 and well above its price at the time Fairfax says the campaign began.

One reason is that Fairfax never lost the support of its big investors. From 2003 through today, Fairfax has raised more than $1.5 billion by selling debt and equity in itself and its subsidiaries. A chunk of the buying has come from a group of longtime Watsa supporters, including Mason Hawkins, the widely respected head of Southeastern Asset Management, and firms controlled by Canada's Power Corp. Southeastern and Power now own more than 50 percent of Fairfax's stock. (Southeastern declined to comment; Power Corp. did not return calls.)

Ironically, if not for the short-sellers, Fairfax's stock might be much lower. A thinly traded, heavily shorted stock like Fairfax's can skyrocket if, for instance, investors who have lent their shares to short-sellers recall them, forcing the short-sellers to find another source of shares to borrow or buy stock to cover their positions.

While Fairfax charges that the defendants have reaped "immense, ill-gotten profits," at least some defendants claim the opposite is true. Exis Capital Management's lawyer David Zensky says that his clients never realized any gains on their short position in Fairfax and in fact have booked substantial losses. Others who have been short Fairfax's stock since the beginning of this decade have lost small fortunes.

The timing of the suit was curious. Kasowitz says that Fairfax filed suit to prevent a "massive attack. We were a day or two away from something very bad happening to the company."

But there may be another explanation. On July 27, just one day after it sued, Fairfax announced that it was working on an extensive restatement of its financials from 2001 to the present. Watsa said that Fairfax would have to reduce shareholders' equity by $225 million to $240 million (or about 7 to 8 percent) as of March 2006 because of accounting errors. Watsa called it a "very embarrassing" moment. But all the headlines were dominated by the lawsuit, and Fairfax's stock only dipped slightly.

In August, when Fairfax did restate its results, the new filings included warnings from both Fairfax's management and its auditors that they had found a number of "control deficiencies" that "could result in misstatements of any of the company's financial statement accounts." (Fairfax says it is "continuing to remediate the material weaknesses.")

A few months later there was another odd coincidence. On Nov. 7, Contogouris filed his own lawsuit against several Fairfax subsidiaries, PricewaterhouseCoopers and Sitrick, laying out his case against Fairfax. Then, on the evening of Nov. 13, Contogouris was arrested. In essence, the criminal complaint tells one side of the civil case between Contogouris and the Greek family for whom he worked, which dates back to 2002.

The next day Fairfax stock rose 10 percent. There's no connection between the criminal charges against Contogouris and Fairfax - but they had an effect. "I think people didn't believe what was in the [Fairfax] lawsuit until Spyro got arrested," says A.M. Best's Sharaf. "Then everyone said, 'Wow. This is true.'"

Fairfax's stock continued to soar, hitting over $200 in late 2006. Kasowitz says this is proof that Fairfax disrupted a conspiracy. The lawsuit "caused these people to restrain themselves," says Kasowitz. That, at least, is true. Contogouris has taken his lawsuit off his Web site and put out a note saying that at the behest of his lawyers, he would no longer analyze stocks. Gwynn also stopped covering Fairfax, citing a "litigation strategy designed by Fairfax to silence negative research."

Yet another curious deal

That might have been the end of the story but for Institutional Credit Partners - the firm for which Carlos Mendez works. ICP does not invest in equities, but it has bought credit default swaps on one of Fairfax's publicly traded subsidiaries, Odyssey Re, which means that it will profit if Odyssey Re fails to make payments on any of its debt.

ICP established its position before being contacted by Fortune and has not traded in any Fairfax or Odyssey Re securities since November. ICP executives provided Fortune with access to unedited research because they are deeply disturbed by the possibility that legitimate research may be being suppressed.

ICP portfolio manager William Gahan began to examine Fairfax in spring 2006. After months of research using only publicly available information, he called Brandon Sweitzer, a senior fellow at the U.S. Chamber of Commerce who is also a Fairfax director, and asked to discuss what he called "accounting peculiarities." Sweitzer, Gahan says, was surprisingly defensive. (Sweitzer did not return a call seeking comment.)

A few days later, on Oct. 12, Gahan got a letter from Kasowitz: "We understand that you have informed a director of the company that you have evidence of financial fraud at Fairfax." The letter went on to demand that Gahan forward any information and analysis he had done to Kasowitz, who also sent ICP a copy of Fairfax's lawsuit.

ICP viewed Kasowitz's letter as an attempt to intimidate Gahan and didn't respond. Shortly after that, Gahan and other ICP employees noticed cars lurking outside their building and following them home. ICP forwarded the license plate numbers to an FBI contact - which explains why the FBI called Mendez. ICP says the FBI confirmed that the pursuers were from Kasowitz's firm. Kasowitz denies having Gahan followed but says his firm has put ICP "under investigation."

Like others before them, the ICP folks ran into dead ends at Fairfax. But there was one deal that they felt showcased how far Fairfax was willing to go in its quest for cash. In March 2003, Fairfax announced that it would buy 4.3 million shares of its subsidiary, Odyssey Re, which would bring its ownership of the unit to just over 80 percent - enough to consolidate its results for tax purposes. That would allow Fairfax to use its big tax losses to offset Odyssey's taxes.

But Fairfax didn't simply pay the $78 million it would have cost to buy the Odyssey Re shares. Instead, Bank of America set up an offshore subsidiary that borrowed the shares - just as a short-seller would do - and sold them to Fairfax in exchange for a $78 million note. The note was convertible back into shares of Odyssey Re at specified times. Fairfax told investors it was buying the shares for "investment purposes" as well as "tax-sharing payments." But it isn't clear what the investment purpose was, because Fairfax would not benefit from an increase in Odyssey Re's stock price - and the IRS frowns on deals that are done only for tax reasons.

ICP spent countless hours dissecting SEC filings and hired tax lawyers and forensic accountants to provide independent validation of its work. "This is not an open and shut case, but there are significant question about whether there was a legitimate nontax business purpose to this transaction," says Bryan Skarlatos, a partner at tax attorneys Kostelanetz & Fink. "We have questions about the economic substance of the transaction," says Philip Kruse, a managing director at Alvarez & Marsal, a consulting firm.

In the summer of 2006, after the New York Post raised questions about this transaction, one analyst asked on a Fairfax conference call, "What risk is there that the IRS looks at the usage of this asset and challenges it?" Watsa reassured listeners that "we had an IRS ruling before we did this." Today Fairfax says it "never sought an IRS ruling on the 2003 transaction because none was needed," and "independent opinions were obtained from respected legal, tax and accounting firms that the transaction fell within IRS guidelines."

Fairfax and Bank of America have since unwound this transaction, and indeed, Fairfax did not benefit from the increase in Odyssey Re's stock price. In addition, Bank of America had to purchase shares to return the shares it borrowed and sold to Fairfax. It is not clear how many shares the bank purchased, but the buying helped Odyssey Re's stock increase more than 20 percent from August to December. And in December, Fairfax sold nine million Odyssey Re shares to investors, collecting $338 million.

All Bank of America will say is that "we do not comment on client matters." Kasowitz's firm says that ICP attempted to "derail" this offering and links ICP to "highly abnormal short trading" in Odyssey Re's shares. But ICP does not trade stocks, long or short.

In late February, Fairfax announced 2006 results. Thanks to the sale of Odyssey Re stock, it now has more than $700 million of cash on its balance sheet. Oddly, the lawsuit itself could be Fairfax's biggest risk. For if it proceeds to the discovery phase and the defendants have to turn over documents, they will surely request Fairfax's internal documents in return. What kind of tale will they tell?

Reporter associates Doris Burke and Patricia Neering contributed to this article.

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