SEC Reportedly Probing Hedge Funds Trading in Advance of Negative Analyst Report

Underscoring the newly-heightened scrutiny of hedge funds, the SEC is investigating whether several hedge funds traded improperly after learning of a highly negative analyst report that was coming out on a prominent insurer, the WSJ reports.

A civil case brought by the insurer, Fairfax Financial Holdings Ltd., alleges that executives at the hedge funds discussed the coming report of the analyst and made trades betting that the company’s stock would decline.  According to the WSJ, Fairfax’s lawsuit alleges that SAC Capital Advisors, Third Point LLC, Kynikos Associates LP and others acted together, paying the analyst, his investment firm and other defendants in the suit to spread false and defamatory information about Fairfax from 2002 through 2007.

At the center of the civil lawsuit and the SEC investigation is a research report by analyst John Gwynn of Morgan Keegan Inc.  Gwynn’s Jan. 17, 2003 report said Fairfax was $5 billion short of the reserves it should have been holding to cover potential insurance claims, and rated it “underperform.”  Fairfax’s shares reportedly fell 13% the day Gwynn’s report was released and slid to a two-day loss of 20% the next trading day, closing at $59.30. According to documents in the case reviewed by the WSJ, some of the hedge funds knew of Gwynn’s report more than a month before it came out.

Read the WSJ article