SEC Opens Insider-Trading Probe Of Kynikos, SAC

Feb 17 2009 | 1:33am ET

Things just went from bad to worse for the hedge funds accused of conspiring to drive down the stock price of Fairfax Financial Holdings.

In the wake of reports that Fairfax’s attorneys have produced evidence that Kynikos Associates and SAC Capital Advisors got wind of a negative analysts’ report on Fairfax a month before its publication, the Securities and Exchange Commission is now looking into what those hedge funds did with the insider information. The Wall Street Journal reports that the SEC has opened an insider-trading probe based on the evidence, filed in New Jersey state court last year.

According to unsealed court documents, 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.

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

Fairfax is also suing hedge fund Third Point, Gwynn and Morgan Keegan.


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