"The "GERMANs are coming" brouhaha reached such a crescendo that officials from
the SEC and the NASD traveled to GERMANy and met with their counterparts in May
2004 to discuss the matter. As reported in previous 'In The Money' columns, U.S.
regulators found that the stocks of most U.S. companies listed on the Berlin"
"Exchange never or hardly traded there and came to the conclusion that no ill
conduct was taking place."
"Also, trading volume on the BERLIN Stock Exchange was nil in 2001 or 2002 and
trading in 2003 was minimal. Some 3,000 shares of Fairfax were traded in
January, 100 shares in February and 3,000 shares in May. These are hardly the
numbers one would expect necessary for nefarious hedge funds to build massive
short positions."
=DJ IN THE MONEY: Fairfax And The Missing GERMAN Trades
By Carol S. REMOND
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--A good conspiracy theory can sometimes be undone by the smallest of details.
When Fairfax Financial Holdings Ltd. (FFH) last month filed a $6 billion lawsuit against SAC Capital Management LLC and others, it became the latest company to take aim at powerful hedge funds. The Toronto-based insurer alleges in its complaint filed in Superior Court in Morris County, N.J., that the funds conspired to denigrate Fairfax and illegally send its share price lower.
Fairfax's complaint follows closely on a script developed by class-action lawyers flushed with anti-tobacco bounties and now taking aim at deep pocketed funds. Other companies that recently filed similar suits include Canadian pharmaceutical company Biovail Corp.(BVF) and Utah-based Internet retailer
Overstock.com (OSTK). The companies generally allege that hedge funds colluded among themselves and with others to illegally depress their stock prices. Two of three companies share the same lawyers and all three name some of the same
defendants in their respective complaints. All three companies are under investigation by the Securities and Exchange Commission. Last year, the U.S. attorney in New York also launched probes of some of Fairfax's insurance accounting practices.
The funds have denied wrongdoings and litigation is ongoing.
But there is one novel fact in Fairfax's complaint that merits a closer look.
The company alleges that the bearish attack on its stock began in GERMANy
shortly after it said it would list its stock on the New York Stock Exchange in
2002.
But trading data don't support Fairfax's allegations.
Fairfax claims in its complaint that hedge funds developed an aggressive
short-selling campaign dubbed the "Fairfax Project" in 2002 and began shorting
its stock aggressively upon its listing on the NYSE in December of that year.
"In order to facilitate the rapid accumulation of their short positions,
enterprise members listed (without any notice to or desire on the part of
Fairfax) Fairfax shares on the BERLIN stock exchange, which they used to
circumvent United States restrictions on short selling," the company said in its
complaint.
But trading data reviewed by Dow Jones Newswires shows that the Fairfax
listing on the BERLIN Stock Exchange predates its announcement in April 2002
that it planned to trade on the NYSE. According to the Berliner Boerse, Fairfax
was listed on that exchange on Aug. 15, 2001, about eight months before its
intentions to list on the NYSE became public.
Also, trading volume on the BERLIN Stock Exchange was nil in 2001 or 2002 and
trading in 2003 was minimal. Some 3,000 shares of Fairfax were traded in
January, 100 shares in February and 3,000 shares in May. These are hardly the
numbers one would expect necessary for nefarious hedge funds to build massive
short positions.
SAC declined comment because of pending litigation.
"I don't know what you are talking about," said Marc Kasowitz of Kasowitz,
Benson, Torres & Friedman LLP, when asked about the disconnect between the
trading data and Fairfax's claims. "The data does fit the allegations." Kasowitz
also represents Biovail.
Fairfax Not The First
Fairfax isn't the first company to have alleged its stock was manipulated
through a GERMAN stock exchange. In fact, the notion that foreign exchange
listings could in some way be used by short sellers to circumvent U.S.
regulations gained notoriety in early 2004 after some small U.S. companies
listed in the loosely regulated Over-the-Counter Bulletin Board started
complaining that their stocks were listed on the BERLIN Exchange without their
knowledge.
The "GERMANs are coming" brouhaha reached such a crescendo that officials from
the SEC and the NASD traveled to GERMANy and met with their counterparts in May
2004 to discuss the matter. As reported in previous 'In The Money' columns, U.S.
regulators found that the stocks of most U.S. companies listed on the Berlin
Exchange never or hardly traded there and came to the conclusion that no ill
conduct was taking place.
Despite this finding, GERMAN exchange listings came up again in January 2005
during a conference call by Overstock Inc. (OSTK), in which Chief Executive
Patrick Byrne discussed the topic with a stock booster using the fake name of
Bob O'Brien. The two mused about whether failures to deliver shares of the
company on time, three days after a stock transaction, could be attributed to
trading on the BERLIN stock exchange or others in GERMANy.
Questions about GERMAN exchanges again surfaced during a panel on abusive
short selling organized by the North American Securities Administrators
Association in November 2005. The meeting was stacked with executives of
companies that allege that their stocks have been illegally depressed and their
lawyers and lobbyists.
Cameron Funkhouser, NASD's senior vice president of market regulations, said
at the time that regulators had taken allegations about manipulative trading in
GERMANy very seriously but that he hadn't found any instance of abusive short
selling through foreign venues.
According to an attendance list reviewed by Dow Jones, also present at the
NASAA meeting was hedge-fund slayer and would be whistleblower Gary Aguirre, who
had been fired by the SEC the previous month.
In late May, Aguirre said in a letter to Congress that the SEC is partial to
hedge funds and that his probe into possible insider trading at Pequot Capital
was halted after he sought to subpoena a powerful Wall Street executive. In
June, Aguirre testified in front of a Senate hearing on hedge funds during which
illegal short selling was widely discussed. Also testifying at that hearing were
Kasowitz, the lawyer now representing Biovail and Fairfax, and Demetrios
Anifantis, a witness supporting Overstock's claims who has also given an
interview about Biovail's allegations and is cooperating with the company's
suit. During the hearing U.S. Sen. Orrin Hatch, R-Utah, asked participants
whether foreign listings in general, and GERMAN listings in particular, could be
used to get around short selling rules in the U.S. Kasowitz replied that he had
"heard some reports similar to the ones that you have read about, Senator."
But back to Fairfax for a moment.
There were plenty of reasons for naysayers to take aim at Fairfax in 2002. The
company's results had suffered because of its exposure to the Sept. 11 attacks
on the U.S. and to Enron Corp. (ENE).
Trading data shows that were 233,862 shares of Fairfax sold short on the
Toronto Stock Exchange, the company's primary trading venue before its NYSE
listing, in Oct. 15 2002. That number jumped to 313,336 shares on Jan. 31, 2003.
Meanwhile, according to NYSE short interest reporting, there were 1.9 million
shares of Fairfax sold short on Jan. 15, 2003, or about 14% of its shares
outstanding. That climbed to 2.3 million shares sold short as of Feb. 14, 2003
and closed around 1.8 million shares short in mid-December 2003.
Despite the continued negative bets by some against it, Fairfax's stock price
rebounded in the year following its NYSE listing, climbing from a low of about
$50.95 a share in late March 2003 to $174.51 a share by late December 2003.
Fairfax's suit against SAC and others came just one day before the company
disclosed multi-million dollar accounting errors. Calling it a very embarrassing
moment, Fairfax's Chief Executive Prem Watsa told investors on July 28 that the
company would restate financial results because of various accounting errors
related to a reinsurance contract with Swiss Reinsurance Co.(RUKN.VX).
The announcement caused Fairfax's stock to fall, and credit-rating agency
Standard & Poor's Ratings Services put the company on CreditWatch for a possible
downgrade.
(Carol S. REMOND is an award-winning columnist who won a Gerald Loeb Award in
2005 for best news service content with "Exposing Small-Cap fraud," a series of
rticles that described how three small companies unscrupulously pumped up their
tocks.)
-By Carol S. REMOND; Dow Jones Newswires; 201 938 2074;
carol.REMOND@dowjones.com
(END) Dow Jones Newswires
11-08-06 1551GMT
Copyright (c) 2006 Dow Jones & Company, Inc. |
