Fairfax Financial Holdings (NYSE:FFH) was first listed on the NYSE on December 20, 2002. During its first 15 trading days there, volume averaged well under 180,000 shares.

Then, on January 16, 2003 FFH volume exceeded 500,000 shares on an otherwise uneventful day in the life of a Canadian insurance company.

The next day, January 17, 2003 Morgan Keegan analyst John Gwynn initiated coverage of FFH with a scathing report and rating of “underperform”, making for one of the more eventful days in the lives of Fairfax shareholders, as their investments took heavy losses on extremely high volume.

Because information drives markets, one would expect to see extra activity in the wake of new information, such as that introduced by Gwynn on the 17th.

But what accounts for the unusually high volume observed the day before Gwynn’s report was published?

The answer to that question would come in October of 2008, when Morgan Keegan announced that Gwynn had been terminated for sharing his unpublished research on Fairfax with a small group of short-selling hedge funds.

Thanks to email messages and trading data recently obtained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit, we know that hedge funds Kynikos Associates, Third Point Capital, and SAC Capital all traded ahead of this material, non-public information. According to legal briefs filed by Fairfax Financial, Rocker Partners (later Copper River Partners) did as well (Rocker Partners denies this, while fighting manfully to prevent disclosing the trading records that would establish the truth, one way or the other).

Trading on material, non-public information, dear readers, is illegal.

In attempting to unravel how all this came about, one hedge fund name appears over and over: Kynikos Associates, run by James Chanos, who also serves as Chairman of the Coalition of Private Investment Companies, the hedge fund industry’s Washington DC lobbying organ.

It started on December 11, 2002 when Kynikos employee Mark Heiman alerted Chanos that he had just learned from an analyst at Ziff Brothers Investments that a Morgan Keegan analyst was about to publish a negative report on Fairfax.

From: Mark Heiman
Sent: December 11, 2002 11:06 PM
To: James Chanos; Douglas Millett
Subject: Fairfax
I just got off the phone with ZBI’s insurance analyst, Michael Ting. He just talked to a new insurance analyst at Morgan Keegan, and apparently that analyst is about to initiate FFRX at “Underperform,” with the thesis being that they are extremely under-reserved into the $3-$5 BN area. Also, there may be an article in Forbes or Fortune soon that will be similarly critical.
Ting said he thought that analyst was one of the best P&C analysts he has talked to, and wanted to give us the heads-up, as well as hear how we’re coming at it.

The next day, Kynikos employee Matt Cantrell apparently contacted Gwynn, as he sent Ting several documents relating to Fairfax subsidiaries, with the comment, “John Gwynn believes these might be of interest to you.”

Four days later, Heiman spoke to Gwynn personally, having a conversation which he summarized in the following report to Chanos:

From: Mark Heiman
Sent: December 16, 2002 4:46 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX than I’ve ever heard a sell side analyst. It looks like his criticisms of from the top to the bottom–everything from underwriting to accounting to dishonesty. He gave me his basics, as he is somewhat restricted because he hasn’t officially launched. It will be interesting to see how much of this the people who run the research department there will let him publish!

On December 18, 2002, Chanos forwarded Heiman’s email to Jeff Perry, then an analyst at SAC Capital.

The day after Fairfax began trading on the NYSE, Gwynn’s revelations became much more explicit as he shared with Kynikos employee Heiman portions of his forthcoming report on Fairfax.

From: Mark Heiman
Sent: December 21, 2002 6:03 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing the issues at FFH, basically those he will be publishing on. He has been a huge help and even offered to talk to me from his home today. We can look at these and talk to him next week–I just wanted to come in today and take a look at what he sent to get a head start on what he sent.

In the days to follow, Gwynn and SAC Capital Portfolio Manager Forrest Fontana held a face to face meeting where they discussed Fairfax.

Fontana followed up on that meeting via email to Gwynn:

From: Forrest Fontana
Sent: January 06, 2003 8:57 AM
To: John Gwynn
Subject: RE: hope you had a nice holiday!
you available to touch-base on Fairfax sometime this week?

Followed by Gwynn’s prompt and eager reply:

From: John Gwynn
Sent: January 06, 2003 9:01 AM
To: Forrest Fontana
Subject: RE: hope you had a nice holiday!
Name the time.

Fontana proposed a conversation the following day and requested a spreadsheet summarizing Gwynn’s analysis on Fairfax, which Gwynn promised to send.

On January 13, 2003 Fontana sent his boss, Steven A. Cohen himself, a summary of his planned activities for the week, which included:

Tuesday 1/14: Morgan Keegan expected to launch on Fairfax with sell rating – we will be covering into this.

As it turns out, Gwynn’s report was published on the 17th of January, not the 14th as Fontana expected. Still, it’s clear that SAC Capital was formally planning to trade ahead of the information received by Gwynn.

Trading records produced by Kynikos and Third Point all tell the same story: heavy short selling in anticipation of Gwynn’s report, and highly profitable short covering in the days that followed.

What did John Gwynn get out of all this? That’s unclear, though upon his firing, Morgan Keegan went to great lengths to say that Gwynn’s opinions were his own and not influenced by the hedge funds that profited from advance knowledge of them.

The next question is: did Morgan Keegan get anything out of this arrangement?

The answer is yes: On December 21, 2002, the day after Kynikos received Gwynn’s unpublished analysis, Kynikos money manager Douglas Millett declared his intention to begin sending business to Morgan Keegan.

Apparently, that’s how big hedge funds like Kynikos operate, which makes Kynikos President James Chanos the logical person to represent his peers before Congress as that body considers long-overdue reforms.

Addendum: today (January 9, 2009) I received a letter from the attorney of Rocker/Copper River Partners protesting my suggestion that the firm was among those trading ahead of the Morgan Keegan report on Fairfax referenced above. In short, Rocker says the analysis was released on January 16, 2003 and their short position established the following day. The story has been slightly edited to reflect their position. I am currently examining the specifics of Rocker’s objections — though find that difficult given Rocker’s attorneys have taken steps to keep sealed what they insist is exculpatory evidence — and will return to this issue shortly.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

Fairfax Financial Holdings (NYSE:FFH) was first listed on the NYSE on December 20, 2002. During its first 15 trading days there, volume averaged well under 180,000 shares.

Then, on January 16, 2003 FFH volume exceeded 500,000 shares on an otherwise uneventful day in the life of a Canadian insurance company.

The next day, January 17, 2003 Morgan Keegan analyst John Gwynn initiated coverage of FFH with a scathing report and rating of “underperform”, making for one of the more eventful days in the lives of Fairfax shareholders, as their investments took heavy losses on extremely high volume.

Because information drives markets, one would expect to see extra activity in the wake of new information, such as that introduced by Gwynn on the 17th.

But what accounts for the unusually high volume observed the day before Gwynn’s report was published?

The answer to that question would come in October of 2008, when Morgan Keegan announced that Gwynn had been terminated for sharing his unpublished research on Fairfax with a small group of short-selling hedge funds.

Thanks to email messages and trading data recently obtained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit, we know that hedge funds Kynikos Associates, Third Point Capital, and SAC Capital all traded ahead of this material, non-public information. According to legal briefs filed by Fairfax Financial, Rocker Partners (later Copper River Partners) did as well (Rocker Partners denies this, while fighting manfully to prevent disclosing the trading records that would establish the truth, one way or the other).

Trading on material, non-public information, dear readers, is illegal.

In attempting to unravel how all this came about, one hedge fund name appears over and over: Kynikos Associates, run by James Chanos, who also serves as Chairman of the Coalition of Private Investment Companies, the hedge fund industry’s Washington DC lobbying organ.

It started on December 11, 2002 when Kynikos employee Mark Heiman alerted Chanos that he had just learned from an analyst at Ziff Brothers Investments that a Morgan Keegan analyst was about to publish a negative report on Fairfax.

From: Mark Heiman
Sent: December 11, 2002 11:06 PM
To: James Chanos; Douglas Millett
Subject: Fairfax
I just got off the phone with ZBI’s insurance analyst, Michael Ting. He just talked to a new insurance analyst at Morgan Keegan, and apparently that analyst is about to initiate FFRX at “Underperform,” with the thesis being that they are extremely under-reserved into the $3-$5 BN area. Also, there may be an article in Forbes or Fortune soon that will be similarly critical.
Ting said he thought that analyst was one of the best P&C analysts he has talked to, and wanted to give us the heads-up, as well as hear how we’re coming at it.

The next day, Kynikos employee Matt Cantrell apparently contacted Gwynn, as he sent Ting several documents relating to Fairfax subsidiaries, with the comment, “John Gwynn believes these might be of interest to you.”

Four days later, Heiman spoke to Gwynn personally, having a conversation which he summarized in the following report to Chanos:

From: Mark Heiman
Sent: December 16, 2002 4:46 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX than I’ve ever heard a sell side analyst. It looks like his criticisms of from the top to the bottom–everything from underwriting to accounting to dishonesty. He gave me his basics, as he is somewhat restricted because he hasn’t officially launched. It will be interesting to see how much of this the people who run the research department there will let him publish!

On December 18, 2002, Chanos forwarded Heiman’s email to Jeff Perry, then an analyst at SAC Capital.

The day after Fairfax began trading on the NYSE, Gwynn’s revelations became much more explicit as he shared with Kynikos employee Heiman portions of his forthcoming report on Fairfax.

From: Mark Heiman
Sent: December 21, 2002 6:03 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing the issues at FFH, basically those he will be publishing on. He has been a huge help and even offered to talk to me from his home today. We can look at these and talk to him next week–I just wanted to come in today and take a look at what he sent to get a head start on what he sent.

In the days to follow, Gwynn and SAC Capital Portfolio Manager Forrest Fontana held a face to face meeting where they discussed Fairfax.

Fontana followed up on that meeting via email to Gwynn:

From: Forrest Fontana
Sent: January 06, 2003 8:57 AM
To: John Gwynn
Subject: RE: hope you had a nice holiday!
you available to touch-base on Fairfax sometime this week?

Followed by Gwynn’s prompt and eager reply:

From: John Gwynn
Sent: January 06, 2003 9:01 AM
To: Forrest Fontana
Subject: RE: hope you had a nice holiday!
Name the time.

Fontana proposed a conversation the following day and requested a spreadsheet summarizing Gwynn’s analysis on Fairfax, which Gwynn promised to send.

On January 13, 2003 Fontana sent his boss, Steven A. Cohen himself, a summary of his planned activities for the week, which included:

Tuesday 1/14: Morgan Keegan expected to launch on Fairfax with sell rating – we will be covering into this.

As it turns out, Gwynn’s report was published on the 17th of January, not the 14th as Fontana expected. Still, it’s clear that SAC Capital was formally planning to trade ahead of the information received by Gwynn.

Trading records produced by Kynikos and Third Point all tell the same story: heavy short selling in anticipation of Gwynn’s report, and highly profitable short covering in the days that followed.

What did John Gwynn get out of all this? That’s unclear, though upon his firing, Morgan Keegan went to great lengths to say that Gwynn’s opinions were his own and not influenced by the hedge funds that profited from advance knowledge of them.

The next question is: did Morgan Keegan get anything out of this arrangement?

The answer is yes: On December 21, 2002, the day after Kynikos received Gwynn’s unpublished analysis, Kynikos money manager Douglas Millett declared his intention to begin sending business to Morgan Keegan.

Apparently, that’s how big hedge funds like Kynikos operate, which makes Kynikos President James Chanos the logical person to represent his peers before Congress as that body considers long-overdue reforms.

Addendum: today (January 9, 2009) I received a letter from the attorney of Rocker/Copper River Partners protesting my suggestion that the firm was among those trading ahead of the Morgan Keegan report on Fairfax referenced above. In short, Rocker says the analysis was released on January 16, 2003 and their short position established the following day. The story has been slightly edited to reflect their position. I am currently examining the specifics of Rocker’s objections — though find that difficult given Rocker’s attorneys have taken steps to keep sealed what they insist is exculpatory evidence — and will return to this issue shortly.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

In a recent interview, SEC whistleblower Gary Aguirre offered his insights into the regulatory failings that allowed the Bernie Madoff scheme to reach such enormous proportions for so long.

Aguirre places particular blame upon the “revolving door” culture that hangs over the SEC’s workforce, with its attendant promise of a lucrative move to the private sector in store for those whose approach to regulation is deemed acceptable to the regulated.

As Aguirre puts it:

The system maintains itself, because those that stay know their turn will come if they play the game. They see a director or associate director move onto a $2 million job with a Wall Street law firm. Then, the departed employee calls back to his former colleagues and says, “you know I really don’t think there is much of a case against so-and-so, I’d like for you to take a look at it.” And the case goes away; the system goes on in perpetuity … [There’s a] culture of ‘don’t rock the boat,’ the industry does not want ‘boy scouts,’ and if you can be effective with the SEC through your contacts, that is a very valuable asset you can bring to the table.

To summarize, Gary Aguirre says that a large part of the SEC’s widely-acknowledged (though not as yet fully comprehended) dysfunction results from the self-reinforcing cycle of:

1. High level SEC staffers accepting positions with powerful institutional market participants, in order that they might…
2. Pressure their former associates to take regulatory action beneficial to their employers, and in the process…
3. Impressing upon former associates the value of regulating selectively – as the former staffer had done – in order to ensure their own eventual move to the private sector.

This revolving door dynamic is at the heart of the high degree of “regulatory capture” observed at the SEC and a central focus of this blog.

But enough of the theory of the SEC’s revolving door…let’s look at it in practice (as Mark Mitchell did in a superb item last month) through the example of Richard Sauer, former assistant director of the SEC’s Division of Enforcement.

First, a little background.

In June of 2003, after 13 years with the Commission – including seven as assistant director – Richard Sauer left the SEC for the law firm of Vinson & Elkins. There, among his clients, Sauer counted Rocker Partners hedge fund.

On October 6, 2006, the New York Times published Bring on the Bears, a rather lengthy opinion-editorial authored by Sauer, which argues, on the surface, that short sellers are as vital to healthy markets as predators are to healthy ecosystems.

Fair enough.

But set in the shadow of that well-worn market truism are some disconcerting clues as to Sauer’s mindset, both present and past.

For one, Sauer is dismissive of the uptick rule (a provision created to prevent bear raids intended to drive a company’s stock down) as an unfair vestige of a by-gone era, calling for its elimination.

For another, Sauer reveals that while at the SEC, he initiated many investigations into public companies based on the tips from short sellers betting on a drop in those companies’ stock prices. Indeed, he says short sellers were his only source for these kinds of investigations.

And for yet another, Sauer defends the relationship short-biased hedge funds have with journalists such as Herb Greenberg, Roddy Boyd, Carol Remond and Bethany McLean, while calling on the SEC to initiate enforcement actions against companies that “attribute their woes to conspiracies by short sellers,” and “retaliate against critics through defamation campaigns and manipulative short squeezes.”

As unsound as his logic is, on one point we can be certain: Sauer is at least telling the truth. A former co-worker confirms that while he and Sauer worked together at the SEC, Sauer had been involved, at least tangentially, in most of the investigations instigated by short-selling hedge fund Rocker Partners.

But the most telling sentence in Sauer’s op-ed piece is the one he didn’t even write, but which appears a the end, as an editor’s note. It reads:

Richard Sauer, a former administrator in the Securities and Exchange Commission’s enforcement division, joined the management at a short-biased hedge fund this week.

Of course, that short-biased hedge fund turned out to be Rocker Partners (which had recently changed its name to Copper River Partners).

In December of 2006 Institutional Investor Magazine published a small story on Sauer’s new gig, noting that “[hedge] funds regularly brought [Sauer] complaints of possible wrongdoing at companies they were betting against.”

When asked whether his job description at Rocker Partners might include getting future SEC investigations launched, Sauer responded, “it remains to be seen.”

In point of fact, thanks to emails produced through discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit, we know that there was nothing at all remaining to be seen, for by mid-November of 2006, Sauer had already emailed keyesr@sec.gov (someone he apparently knew well enough to address only as “Rob”), pointing him to one of the anti-Fairfax sites set up by Spyro Contogouris, and attempting to spin Contogouris’ then-recent arrest on embezzlement charges as a Fairfax-motivated act of retribution.

In light of what we’ve just learned, let’s revisit Gary Aguirre’s theory of regulatory capture at the SEC:

1. Former Associate Director of Enforcement Richard Sauer accepts a position with Copper River Partners, a short-biased hedge fund known to be heavily shorting Fairfax Financial.
2. Sauer pressures former SEC colleague Robert Keyes to take regulatory action likely to negatively impact the share price of Fairfax.
3. Keyes is impressed by the need to regulate selectively – as Sauer had most likely done while at the SEC – in order to ensure his own eventual move to the private sector.

And the cycle continues.

Of Aguirre’s three requirements, we can state with certainty that in the case of Richard Sauer, the first two are satisfied. It is my opinion that the third requirement has been, as well.

What all this means is not that Richard Sauer is a bad person, for I don’t know a thing about his character. What I do know is that he has spent most of his professional career enabling bad people, first from within a fatally flawed regulatory agency, and later from without.

Mr. Sauer, if you’re reading this, given your recent unemployment following Copper River’s collapse, I sincerely hope you’ll hold out for a job that breaks the cycle of regulatory capture and actually makes the world a better place in the process.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

Among the disturbing facts contained in the recently unsealed documents obtained via discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit are the lengths to which short-selling hedge funds go to attack the leadership of the companies they’ve designated for destruction.

In the case of Fairfax, when the work of corrupt Morgan Keegan stock analyst John Gwynn and thestreet.com columnist Peter Eavis failed to get the job done, a “real” expert was called in; namely: Spyro Contogouris of MI4 Reconnaissance.

Contogouris and MI4 employee Max Bernstein were hired by Exis Capital Management, among the smaller of the half-dozen hedge funds comprising the “Enterprise” targeting Fairfax, in early 2005. Their primary mission was to gain access to material non-public information from sources in and around Fairfax. Their secondary mission seems to have been harassment of Fairfax executives, both public and private.

This effort got off to an impressive start, in the form of a 30-page document anonymously sent by Bernstein to Rev. Barry Parker, head of the Toronto church attended by Fairfax CEO Prem Watsa. The gist of Bernstein’s package was as follows: Prem Watsa bears a striking resemblance to a convicted swindler named Marty Frankel, and even if Watsa is not Frankel, Rev. Parker should beware and call Watsa to repentance for Fairfax Financial’s accounting.

In December of 2005, Contogouris and Bernstein created premwatsa.com, an attack site. In one exchange of instant messages, the two discuss how to use posts planted on stock message boards to build traffic to the site, and blithely speculate as to how Watsa and other Fairfax officers will react upon discovering it.

Meanwhile, Contogouris created a document, since discredited, dubbed “Fairfax Fraud Facts”, which he circulated broadly among journalists and analysts. This document sparked substantial negative coverage of Fairfax.

It was possibly in this context that, in an undated instant messenger exchange, Andrew Heller, manager of Exis Capital, told Bernstein: “tell spyro, bloomberg was taken care of, and he will receive payment.”

I contacted Heller, seeking context to clarify this potentially significant tidbit, but he refused to comment, citing the ongoing nature of the Fairfax lawsuit. The only thing of any substance Heller would say was that his hedge fund remains “up net 15% on the year.”

Congratulations, Mr. Heller.

MI4’s effort to secure inside information ramped up significantly in May of 2006.

On the 29th of that month, MI4 created the following “Intelligence Profile” on an officer of Fairfax (whose name is redacted):

On May 31st, Contogouris, posing as a reporter, gained access to the back offices of that Advent Group, a Fairfax subsidiary in London, trolling for potential insiders to act as sources.

The next day, Contogouris personally delivered a package to Advent Group CFO Trevor Ambridge, asking that Ambridge provide inside information or risk criminal prosecution.

From his emails, one gets the impression that this is the sort of thing Contogouris quite relishes. However, presently things would take a rough turn for the self-styled corporate spy.

The first blow came six weeks later, when Fairfax named Contogouris in the lawsuit that led to the document production that led to this post.

The second, more severe blow came in November of 2006, when Contogouris was arrested by the FBI, charged (and subsequently indicted) with engaging in an unrelated multi-million-dollar real estate fraud.

While this came as a surprise to many, seasoned observers might have predicted something negative was about to happen to Contogouris when, in late September of 2006, apropos of nothing, Rocker Partners order-taker and former New York Post business writer Roddy Boyd, wrote FBI’S SECRET SOURCE, claiming:

“An FBI spokeswoman confirmed to The Post that Spyro Contogouris, who analyzes companies’ balance sheets, was deputized by the FBI in June to approach Fairfax’s former chief financial officer, Trevor Ambridge, as part of an investigation into the insurance company’s accounting and stock trading.”

It’s worth noting that none of the other writers following up on Boyd’s story — myself included — managed to get FBI confirmation of the supposed “deputy” status bestowed upon Contogouris.

In fact, the United States Senate Judiciary Committee found Boyd’s claim sufficiently strange to specifically ask FBI Director Robert Mueller about it, three weeks after Contogouris was arrested. Mueller’s response (see pages 70 and 71) was simple:

“The FBI does not “deputize” members of the general public.”

So what was motivating Boyd and Contogouris?

For Boyd’s part, that’s simple: as is revealed in documents unsealed in the Fairfax case reveal, (documents which I will be examining here shortly), Roddy writes what certain short-selling hedge funds tell him to write.

As for Contogouris, I suspect that, aware of the trouble looming on the real estate front, he made contact with the FBI as a “confidential informant” (something you or I could do at any time) seeking to ingratiate himself with that agency, possibly earning what he expected would be some form of immunity from other prosecution in the process. Then, fearing that despite these efforts his arrest was imminent, Contogouris used his hedge fund contacts to plant the story with Boyd, hoping the feds would be too embarrassed to nab someone they apparently trusted enough to “deputize”.

Four months after his arrest, the story of Spyro Contogouris and Fairfax was examined at length by another high profile business writer, who practically tied herself in a knot attempting to distance Contogouris from Fairfax’s attackers while simultaneously lending credibility to his work.

The author of that piece was none other than Bethany McLean.

To quote my friend Patrick Byrne: “If only there were a pattern.”

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

In a recent item, I concluded — based on my analysis of an email exchange between former Fortune reporter Bethany McLean and Copper River Partners (formerly known as Rocker Partners) — that McLean wrote a highly critical article about Fairfax Financial Holdings (NYSE:FFH) with the expectation that her work would cause FFH stock to drop precipitously in value.

By way of review, the evidence shows that a manager of Rocker Partners hedge fund first approached Bethany McLean about Fairfax on December 7, 2006. Bethany then met with Rocker Partners employee (and former SEC attorney) Richard Sauer 11 days later, and presumably began work on what would become her March 6, 2007 article The inside story of a Wall Street battle royal shortly thereafter.

The evidence further demonstrates that when, by March 21, 2007, FFH stock price had gone up 45 points instead of down as expected, McLean was unhappy.

Why would this be?

Anybody familiar with the ongoing conversation held on this blog knows the answer, but not wanting to take for granted that all readers here are either sufficiently seasoned or in agreement, I offer the following, which was, like the above-referenced email exchange, gleaned from the many documents gained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit; specifically, from records of Rocker’s evolving short position in Fairfax stock during the months before and after the publication of McLean’s article.

Beginning on January 4, 2007: ten trading days after McLean met with Richard Sauer, Rocker Partners shorted $2.4-million in Fairfax stock.

In February, Rocker added just over $100,000 to their Fairfax short.

Then, on March 1, 2007, three trading days before McLean’s article, Rocker added another $1.5-million to their position.

All told, Rocker was betting at least $4-million that the price of Fairfax stock would drop.

But unfortunately for Rocker, that’s not what happened.

Indeed, Fairfax stock rose a healthy 20% between March 6th and 22nd, when Rocker’s partner emailed McLean, wondering why Fairfax wasn’t dropping as a result of her story, as expected.

Apparently satisfied that circumstances were unlikely to improve, that very day Rocker began covering its short position…97,000 shares worth, to be exact. By the end of May, Rocker’s entire Fairfax short position was closed out, at a substantial loss.

Of course that’s all interesting, but as always, there’s more.

An analysis of the failed trades in Fairfax stock recorded and disclosed by the SEC for that period proves instructive.

Most notable is the sharp decline in FFH failures to deliver observed at the end of May, 2007. In fact, with the exception of a transient spike on June 8, fails are essentially reduced to zero at precisely the same time Rocker Partners closes out its FFH short position.

Given such a deep commitment to cheating, I find it surprising Rocker Partners never managed to be a more successful hedge fund.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

One of the central theses of The Story of Deep Capture, Mark Mitchell’s epic work of media criticism, is that the staff of TheStreet.com is overwhelmingly beholden to the interests of a few criminal, short-selling hedge funds.

Herb Greenberg, Dan Calorusso, Dave Kansas, Jesse Eisenger: all launched their careers at TheStreet.com.

Such an ignominious list of alumni is matched only by the institution’s co-founder: Jim Cramer, and early investor: David Rocker (founder of Rocker Partners hedge fund).

There’s little doubt that TheStreet.com has been home to more than its fair share of captured journalists. What’s less clear is the matter of cause and effect: does the organization excel at breeding, or merely attracting such people?

Based on the example of former TheStreet.com writer Peter Eavis — contrasting what can be learned about him in the many documents recently made public in the lawsuit pitting Fairfax Financial against SAC Capital and several other hedge funds, with what he’s accomplished since — I’m inclined to believe that the dysfunction at TheStreet.com is a product of the toxic culture of the place, and that well-intended writers with talent who leave early enough have the capacity to redeem themselves.

Peter Eavis features prominently in several documents acquired through discovery in the Fairfax case. The earliest mention of him appears in an email dated July 10, 2002, in which John Hempton told Rocker employee Monty Montgomery “I have Peter interested” in his belief that Fairfax Financial was a fraud.

Later, short selling hedge fund manager Jim Chanos refers to Eavis as John Hempton’s “guy”.

On January 15, 2003, Eavis published his first column on Fairfax: Unsure times for insurer Fairfax Financial, making a special effort to attack the integrity and business acumen of Fairfax CEO Prem Watsa.

While the tone of that piece implies plenty about Eavis’s state of mind when he wrote it, somewhat more telling is the comment he uses to preface the article when sending it, just 20 minutes after publication, to Rocker hedge fund employees:

“Watsa good old Canadian insurer to do?”

One month later, Eavis publishes Fairfax Tirade Can’t Obscure Sea of Red, comparing Prem Watsa to, among other things, a wounded animal.

Less than 20 minutes later, Eavis sends the column to Rocker, prefaced by:

“Prem gets nasty.”

Exactly one month later, it was Eavis again, with Fairfax’s Buffett Pose Falls Short, which he again promptly sent, this time commenting:

“Imitation gives way to evisceration.”

On April 3, 2003, Eavis is back on the attack, with Fairfax Walks the High Wire on Rates, which he also wastes no time in noting:

“Prem in the bunker.”

One month and two days later, Eavis writes Fairfax Fog Only Thickens, calling the company “beleaguered” despite its having just announced first quarter earnings of $10.60 per share. Eavis claims he offered Fairfax an opportunity to respond, but that the company “didn’t immediately return a call seeking comment.”

The lack of a prompt return call might have been a result of the fact that Eavis filed his column at 7:10am EDT.

While Fairfax employees likely were not in the office at that early hour, we know Eavis was, as he emailed the column within six minutes, prefaced by:

“More on the anti-Buffett.”

Finally, on May 15, 2003, we see the most telling email exchange of all, this time following Eavis’s column Fairfax Is Banking on the Luck of the Irish.

In stark contrast with the victorious tone of the emails on his four earlier columns, Eavis is sheepish when announcing this latest, saying:

“Two numerical errors in the first version, so I’m re-sending this. The mistakes made Fairfax look better than it should. A link to the corrections can be found at the bottom of the piece. Apologies.”

Apologies?

Apologies!

Hey, Peter…even the best reporters make mistakes. That’s why pencils have erasers, as they say, and why publications have “Corrections and Clarifications” sections. If you owe anybody an apology, it’s your readers, which was taken care of in the body of the correction itself.

And yet, Eavis apparently felt apologies were also due Rocker Partners hedge fund, where an anticipated payday depended upon Fairfax looking as bad as possible.

Why on earth would Eavis feel such a debt to Rocker?

A little less than an hour later, Monty Montgomery replied, writing:

“…….boy, hard to believe, but i think it’s very true…..this ends up with Hempton summoned to toronto to tell the authorities/regulators how he figured it out when no one else could……toronto’s just across the lake from the farm, that will be a good excuse for us all to get together there and throw back a couple of cold beers…….”

To which Eavis responded:

“sounds very tempting — both the farm and the ringside seat for watsa’s comeuppance.”

I’d be hard pressed to list all the standards of ethical journalism Peter Eavis violated in just his first five months of covering Fairfax Financial.

But if I were to try, I’d start by pointing out the deep conflict of interest inherent to obviously using his column as a tool to make David Rocker, one of his employer’s largest investors, rich.

Interestingly, in the months to follow, Eavis seemed to lose interest in Fairfax, his frequency of coverage plummeting from over one column a month to less than one per quarter. About that time, he also seems to have quit seeking the approval of anybody at Rocker Partners.

Then, in 2006, Eavis left TheStreet.com for the Wall Street Journal, where he has evolved into a quite prolific and skilled contributor, whose broad body of work appears not to include anything relating to Fairfax.

Is Peter Eavis corrupt? I’d have to say that no, I don’t think so. At least not corrupt after the tradition of Bethany McLean.

Instead, I suspect the culture at TheStreet.com to be very corrupting, though the condition does not have to be a terminal one.

Finally, I wish to point out that in seeking his comment, I did establish contact with Peter Eavis, and at his request provided copies of the above-referenced emails. I was disappointed when he failed to offer a response two days ago, as promised. Should Peter change his mind at any time, I will gladly append his comments below.

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While an examination of the recently-unsealed products of discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, el al, lawsuit reveals the extensive involvement of most all the usual players — both in the world of hedge funds and business journalism — one name, mostly unknown to those outside Fairfax circles, appears quite prominently: John Hempton of Sydney, Australia.

Hempton, it appears, conceived of and initially orchestrated the entire Fairfax fiasco. At the time, he was a senior analyst at Australia’s Platinum Asset Management hedge fund. Last year he left Platinum to join Global Value Investors, though on May 15 of this year, Hempton started a blog and began calling himself semi-retired; leading me to presume that some time in early May, Hempton and GIV parted ways.

Though possibly mere coincidence, Herb Greenberg abandoned his MarketWatch gig on May 1, 2008 while Bethany McLean announced her departure from Fortune three days later. Greenberg and McLean, as it turns out, both play notable roles in the apparent Hempton-inspired conspiracy.

A reading of Hempton’s early efforts to win converts to his thesis that Fairfax was a ticking time bomb waiting to implode suggests his conclusions were based on what he viewed as sound principles; he really was convinced, and composed multiple, lengthy missives outlining his reasoning. I suspect Hempton’s mistake was then convincing some of the worst people on Wall Street, whose methods fill the pages of this blog, and whose influence probably turned his project from a speculative to a criminal enterprise, dragging Hempton down with it.

That’s not to say that any of this absolves Hempton of blame.

For one, a 2002 email sent to Rocker Partners employee Monty Montgomery makes it clear that Hempton is prominent stock message board poster Brolgaboy (and brolgaboy1 on Yahoo Finance).

I asked Hempton to comment on or clarify this email, but he refused.

That may be because he knows that, thanks to the Yahoo Dissembler Sorting Algorithm bug, it’s possible to know with certainty that in addition to brolgaboy1, Hempton is also Yahoo posters jamiewoodford1, scudzy_short, zipperdydoodah, and (my favorite) mr_byrnes_sith_lord.

Between them, these accounts have many hundreds of posts on Yahoo Finance, to say nothing of the hundreds more posted to several other boards.

Here’s where I really begin to lose patience with John Hempton.

On August 15, 2005, Hempton created and began posting taunting messages under the name mr_byrnes_sith_lord. This was three days after DeepCapture.com contributor and Overstock.com CEO Patrick Byrne announced a lawsuit against Gradient Analytics and Rocker Partners hedge fund for conspiring to get rich by destroying his company. At that time, Byrne further announced that he had evidence of a central figure — whom Byrne metaphorically compared to the shadowy “Sith Lord” of the Star Wars series — coordinating these attacks in ways nobody had previously considered possible.

Also on August 15, 2005, Hempton created the Sith Lord blog, which he further used, over the space of two months, to deride Byrne for claiming that short-selling hedge funds might operate in a coordinated way to destroy public companies.

In case you’ve missed it, the extreme irony here is that at least initially, in the case of the attack on Fairfax Financial, Hempton himself filled a version of the very role he attacked Byrne for daring to claim exists.

More than just irony, this, my friends, is a perfect example hubris as defined by the ancient Greeks: an act of extreme pride and arrogance that humiliates the victim, and ultimately the perpetrator as well.

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There’s no sense denying it: reporters depend on sources, and in the mind  of most business journalists, a connected hedge fund manager will always prove a more valuable source than even the CEO of a public company.

Hence, as I’ve reminded my fellow market reformers time and time again, it is not necessarily a sign of corruption that some business journalists — Bethany McLean included — regularly toe the hedge fund line.

However, as I’ve very recently learned — at least in the case of Bethany McLean — I was wrong.

What changed my mind?

Christmas.

Rather, the early Christmas that arrived for me in the form of about 1,000 pages of discovery just unsealed in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit, in which Fairfax claims a conspiracy (or “Enterprise” as it is termed in the suit) involving multiple short-selling hedge funds, financial analysts and business journalists intent on destroying the company for monetary gain.

Included in this mass of documents are hundreds of emails and instant message transcripts between hedge fund managers, their operatives and such “journalists” as Bethany McLean, Herb Greenberg, and Roddy Boyd.

Almost without exception, each of these is immensely useful in understanding how these folks all relate to each other. But among them all, the most revealing — to say nothing of damning — are those between Bethany McLean, then of Fortune, and the upstanding folks at hedge fund Copper River Management.

The emails appear below in blue, with my comments in black.

Sent: Thursday, December 7, 2006 3:21:12 PM
To: Bethany McLean
Subject: ffh

FFH is the Canadian Enron and it could even be worse…We are sending you stufff.. I suggest since [Copper River employee and former SEC attorney Richard] Sauer is on the East Coast (for now) that you 2 meet, and soon… there is an “enterprise” here and he can lay it out clear as day.

It bears noting that, according to filings in the Fairfax suit, the various participants in the attack on Fairfax stock referred to their effort collectively as “the Enterprise”. Whether or not this is what is being alluded to when using the term — which might not otherwise belong within quote marks in this context — is not clear, but certainly suggestive.

From: Bethany McLean
Sent: Thursday, December 7, 2006 3:48:43 PM
Subject: Re: ffh

Makes sense. Send me whatever you can think of – the more documents the better!

Without receiving a bit of proof to back his Enron/Fairfax comparison, McLean finds it “makes sense” and commits to move ahead.

Sent: Thursday, December 7, 2006 3:51:37 PM
To: Bethany McLean
Subject: Re: ffh

don’t you worry…where do you want the stuff fed-exed to… I would set up a time for Sauer to come and see ya.. His code name is “Lavaman”…

This exchange is then forwarded to employee  Rick Sauer, who schedules a meeting between himself and an unusually eager McLean, set for one week thence.

The outcome of that process was McLean’s scathing March 6, 2007 Fortune piece: The inside story of a Wall Street battle royal.

How can I be certain that this particular story was the direct result of these efforts? The answer to that question is where the situation becomes particularly disturbing…sufficient to leave me feeling physically ill, and prepared to officially add Bethany McLean to the short but distinguished list of truly captured and corrupt journalists.

Sent: Wednesday, March 21, 2007 9:51 AM
To: Bethany McLean
Subject: ffh

you hear anything there??? the stock is up 45 points since your piece and I dont understand it…

Of note: on March 5, 2007 FFH closed at $190.09, and on March 21, 2007, FFH closed at $234.53, a difference of $44.43.

From: Bethany McLean
Sent: Wednesday, March 21, 2007 11:51:57 AM
Subject: Re: ffh

I’m getting the same question from other people. No, I don’t have a clue. I’m worried they’ve gotten the SEC or the Southern District to take them seriously – the Spyro [Contogouris] stuff makes you realize anything is possible – and they’re leaking the news to shareholders ahead of time. What do you think?

A day later, McLean receives email with nothing more than a cell phone number.

Sent: Thursday, March 22, 2007 5:12 PM
To: Bethany McLean
Subject: Re: ffh

415-350-****

Based on McLean’s reply, we can presume she followed this tacit demand, and that the conversation was less than pleasant.

From: Bethany McLean
Sent: Thursday, March 22, 2007 6:12:48 PM
Subject: Re: ffh

Sorry to be a little bad-tempered. This FFH story almost killed me, so I hate hearing that it was pointless. Maybe it’ll be a long, slow thing..

I suspect the emails you’ve just read are the real reason Bethany McLean made a sudden departure from the world of business journalism earlier this year.

As for me, it’s been nearly 24 hours since I first encountered this exchange, and yet I still cannot read it without feeling like I’ve just taken a blow to the solar plexus.

Seeing proof that both a hedge fund manager and an ostensibly reputable business writer viewed the sacred institution of journalism as a means of wrecking a company, and that they both also felt disappointment when their efforts proved insufficient, with the “journalist” finding solace in the prospect that the company’s eventual destruction might simply be a “long, slow thing” literally leaves me breathless.

Stay tuned for still more of the explosive revelations found within the reams and reams of discovery in this case.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“