E-Mails Show Kynikos, SAC Received Insider Info On Fairfax

Feb 13 2009 | 3:54am ET

The financial services firm suing several hedge funds for allegedly conspiring to drive its stock price down has presented evidence that it claims shows both that conspiracy and insider-trading on the part of Kynikos Associates.

E-mails unsealed by the New Jersey court hearing the case appear to show that Kynikos chief James Chanos knew about a negative analyst report forthcoming on Fairfax Financial Holdings more than a month before its publication. According to the unsealed documents, he passed the non-public information on to fellow hedge fund SAC Capital Advisors.

In December 2006, Kynikos analyst Mark Heiman e-mailed Chanos, telling him that he had heard from an insurance analyst at another firm that John Gwynn, an analyst at Morgan Keegan & Co., planned to begin covering Fairfax, and that he did not hold the firm in high esteem, the unsealed documents show. Five days later, on Dec. 16, Heiman wrote Chanos that he had spoken with Gwynn, saying that “he was more critical of FFRX than I’ve ever heard a sell-side analyst. Everything from underwriting to accounting to dishonesty.” Five days after that, Heiman reported that Gwynn had faxed him an outline of his planned research report.

That report did not appear until Jan. 17, 2003.

Fairfax sued Kynikos, SAC, Morgan Keegan and Gwynn, seeking $6 billion in damages. The firm says the hedge funds and analyst were in cahoots, engaging in racketeering, commercial disparagement, tortuous interference with contractual relationships and conspiracy.

To the latter’s end, Fairfax’s lawyers offer a trio of e-mails that paint a picture of a three-way intercourse between Kynikos, SAC and Gwynn. On Dec. 18, Chanos forwarded Heiman’s Dec. 16 e-mail to John Perry at SAC. On Jan. 6, 2003, Gwynn, responding to a request from a SAC employee, wrote that he would send a spreadsheet on Fairfax. And on Jan. 16, Heiman wrote Chanos, “Just got off the phone with Gwynn at Morgan Keegan—his piece that rips FFH apart is supposed to be published tomorrow. Should be interesting to see how the street reacts.”

Morgan Keegan later fired Gwynn for passing on the non-public information.

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

Gwynn has countersued Fairfax in April, saying claims that his research was fraudulent are defamatory. Kynikos has also denied any wrongdoing.

At a Sept. 25 hearing, Fairfax’s attorneys alleged that Kynikos stopped covering his short positions in Fairfax soon after learning about the forthcoming negative report.

“Chanos had been covering his positions up and until the point when he receives the tip that Gwynn is going to issue his report,” Michael Bowe, a Fairfax lawyer, said. “And between that time and the time of the report coming out, he shorts over $5 million worth of Fairfax shares, half of which he shorts the day before the report comes out.”

Kynikos rejects those claims, saying it reduced its short interest in Fairfax when it received the information about the Gwynn report, and that it increased its short position “by a modest amount” the day before Gwynn’s report was published.

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