Special Report: OMG! Dan Loeb said what?

Fri Mar 11, 2011 11:10am EST
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By Matthew Goldstein

NEW YORK (Reuters) - It was the summer of 2006 and hedge fund manager Daniel Loeb was having difficulty containing his very harsh feelings toward Fairfax Financial, the Canadian insurance giant, and its CEO, Prem Watsa.

Loeb's New York-based fund, Third Point LLC, had placed a big bet that the shares and bonds of Fairfax and its subsidiaries would tumble. He was looking forward to cashing in his hedge fund's chips, if and when some bad news rocked Fairfax. And he shared that enthusiasm with another hedge fund manager, in a fairly graphic email message that recently surfaced in a five-year-old civil lawsuit filed by Fairfax against Loeb and other prominent hedge fund managers.

"Prem Watsa bend over the hedge funds have something special for you," Loeb wrote in the June 25, 2006 email to Adam Sender, the founder of Exis Capital, whose hedge fund also was "shorting" Fairfax -- that is, looking to profit from a decline in its shares. A little later that day, in an email to a consultant who was doing research for some of the hedge funds wagering on Fairfax's fall, Loeb wrote: "die, Prem Die!"

A month later, Fairfax sued Loeb and Sender, as well as famed short-seller James Chanos and billionaire hedge fund trader Steven Cohen, claiming they had teamed up to "crush" the company's stock. The Toronto-based insurer, which some of the defendants openly had dubbed "the next Enron," contends Loeb, Chanos, Cohen and Sender orchestrated a multi-year campaign to spread disinformation about Fairfax's business model to a number of well-known financial journalists.

The managers argue they did nothing wrong. They say it's normal for bearish stock traders to dig up critical -- even negative -- information about a company that they suspect is presenting a misleading image in its financial statements.

But now those old emails and others like them are coming back to haunt Loeb, as Fairfax's civil lawsuit creeps along in a Morristown, New Jersey, courtroom and some of 10 million pages of previously sealed documents in the case start coming to light. And while the profane language used by Loeb, a 49-year-old father of three young children, may not shock anyone who works on Wall Street, such crude talk could make some investors queasy -- especially institutional investors who have less of a stomach for negative headlines.

The disclosure of those emails in a recent 800-page court filing by Fairfax's lawyers comes at an especially awkward time for Loeb, who emerged in 2010 as one of the $1.9 trillion hedge fund industry's star performers and is poised to do so again this year. The emails, however, are a rude reminder of Loeb's earlier days, when he was perhaps best known for sending caustic letters to the boards of companies his fund had taken a big stake in.

While Loeb still engages in so-called activist investing, it's a less important part of Third Point's strategy, according to the fund's marketing information and people who know Loeb. Indeed, Third Point's nearly 40 percent gain last year was more attributable to placing savvy bets on a rebound in consumer stocks, the rising fortunes of gold and a surge in the value of beaten-down mortgage-backed securities than from agitating for change at a company or even shorting stocks.   Continued...

<p>Daniel Loeb, CEO, Third Point LLC, participates in the "Financial Firms: Past, Present and Future" panel at the 2010 Milken Institute Global Conference in Beverly Hills, California April 27, 2010. REUTERS/Phil McCarten</p>