The ties that bind Dan Loeb and Jim Chanos

June 2, 2011

By Matthew Goldstein

Dan Loeb and Jim Chanos may not be the best of friends, but a five-year-old stock manipulation lawsuit filed by a Canadian insurer has revealed a one-time alliance of sorts between the hedge fund managers.

It appears Loeb followed Chanos’ lead in shorting–or betting against–shares of Fairfax Financial in 2002 after exchanging a series of emails about the Canadian insurer that summer.

Litigation papers in the lawsuit reveal that Chanos initiated the email exchange with Loeb, asking the Third Point hedge fund manager if he was shorting shares of Fairfax. Loeb responded to Chanos’ email by asking whether he should be. Chanos wrote back that in his opinion Fairfax’s  shares were “going to zero.”

From the email exchange it appears Loeb’s fund was not yet betting on a big decline in the price of Fairfax’s stock and hadn’t given much thought to insurer. But soon after that back-and-forth between managers, Third Point began betting heavily against the fortunes of the Canadian insurer–just as Chanos’ Kynikos Associates was already doing.

In its lawsuit, Fairfax claims Chanos and Loeb joined forces with SAC Capital’s Steve Cohen and others to drive down the price of Fairfax’s stock by spreading misinformation about the company’s financials. The hedge fund managers have denied that allegation and have been locked in a long-running legal battle with Fairfax.

Just recently Cohen’s SAC Capital has filed a motion to dismiss the case against his $13 billion hedge fund. Meanwhile, lawyers for Kynikos recently filed litigation papers arguing that claims against Chano’s hedge fund should be “severed” from those against the other defendants. In the filing, Kynikos argues that its actions were consistent with what short-sellers do when they find a company they believe is ripe for the picking:

Kynikos had a firmly held belief that Fairfax was a troubled company. Kynikos shared that belief with other professionals in the financial markets and financial journalists, and — as one would expect in the relatively small short-selling community–shared consultants and employees/former employees in common with some of its competitors.

The claims Fairfax has filed against Kynikos, Third Point, SAC Capital and the other hedge funds are a long way from being resolved. But if nothing else, the litigation papers shed light on some of the alliances that get formed in the rough and tumble hedge fund world when it serves a trader’s financial interest.


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