Is Daniel Loeb Really A Liar?

Daniel Loeb’s Third Point, Steve Cohen’s SAC Capital Advisors LP, Jim Chanos’ Kynikos Associates Ltd. and Exis Capital Management Inc was shorting Fairfax Financial Holdings, believing that it has significant accounting irregularities and that it might be a fraud.

what is a hedge fund

Daniel Loeb wrote in a letter to his clients that Fairfax is one of the most thoroughly researched investments in Third Point’s history.

Fairfax sued short sellers in 2006, seeking more than $8 Billion in damages. According to Bloomberg News, Fairfax’s lawyers later asked for the “research documents” during the discovery phase but Third Point didn’t produce any research documents. Dan Loeb also had to admit in his deposition that he didn’t know what finite reinsurance was, despite the fact that he cited this as one of the bases for believing Fairfax was a fraud.

Does this make Dan Loeb a liar?

First, Fairfax had to restate its financial results one day after they filed suit against Loeb, Cohen, and Chanos. This is what Third Point said: “Third Point’s research regarding Fairfax was borne out when the company was forced to restate its financial statements, erasing over $235 million of shareholder equity just one day after this lawsuit was launched in 2006.”

Second, Dan Loeb doesn’t need to know what finite reinsurance is on order to short sell an insurance company. His analysts or partners can do the research. If they didn’t do the research themselves, it’s still OK. Maybe one of the other short sellers did the research and they relied on that. Jim Chanos has a reputation to short sell companies that have accounting irregularities. If we get a tip from Chanos that there’s something fishy going on at Company A, we may short sell that company too. There aren’t a lot of hedge fund managers who are as credible as Jim Chanos is.

If Chanos didn’t do the research himself and had been using outside consultants, that is still fine. What’s important is whether the claims were accurate or not. Fairfax had to restate its numbers and this gives a lot of credibility to the short sellers.

Short selling isn’t easy and short sellers do a necessary service for the financial markets by assuming enormous risks. When they are wrong, they get killed in the market. Whitney Tilson lost a bundle on his Netflix short for instance. When they are right, all they can get is 100% return. Short sellers aren’t the villians in the financial markets; they’re the underdogs.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!