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 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

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!