Hedge fund faces lawsuit over 'Dick Tracy' allegations By Christine Seib http://business.timesonline.co.uk/article/0,,13129-2319307,00.html ONE of the worldâs most powerful hedge funds faces a $5 billion (Â£2.6 billion) legal action alleging that it employed a secret agent known as Dick Tracy to blackmail, harass and follow employees of a company that it was short-selling in order to drive the share price down. The allegations involve corrupt analysts, fake identification, group sex and New Yorkâs St Patrickâs Cathedral but lawyers for Fairfax Financial Holdings, the claimant, insist that the nefarious activities listed are ânot uncommonâ in the world of short selling. * Michael Bowe of Kasowitz, Benson, Torres & Friedman, who filed the claim with the New Jersey State Court, said: âYou can draw the conclusion that these types of claims will be seen more frequently.â SAC Capital Management, the $7 billion hedge fund run by Steven A. Cohen, and other prominent funds, including Exis Capital Management and Lone Pine Capital, have until the end of September to respond to Fairfaxâs claim. SAC already faces a $4.6 billion claim brought by the same law firm on behalf of Biovail, a Canadian drug company, on similar grounds. Short selling â borrowing shares and selling them in the hope that the price will fall so the seller can buy the shares back at a lower price â is not illegal. Manipulating the stock market, however, is prohibited by anti-racketeering laws. Fairfax claims that a number of hedge funds colluded with analysts, chiefly John D. Gwynn of Morgan Keegan, an investment manager, to issue misleading statements, harass workers and shareholders and incite regulatory investigations of the company. Fairfax believes the concerted campaign between 2002 and 2005 to drive down its share price started because the funds were concerned that Fairfaxâs stock was rising on the back of a company turnaround. Among the more lurid accusations, Fairfaxâs founder and chief executive, Prem Watsa, alleges that an agent of the hedge funds, using the pseudonym P. Fate, sent a package to the pastor of the church of which Mr Watsa chairs the investment committee. âBe aware Father, be sceptical and ask Mr Watsa to make confession,â the accompanying letter said. The letterâs return address was given as St Patrickâs in New York. SAC denies the accusations. âThis is another baseless lawsuit by a company attempting to shift blame for its fundamental business problems,â a spokesman said. Critics of Fairfax point out that the company had restated its results because of accounting errors, while its subsidiaries have missed Securities and Exchange Commission filing deadlines. The insurer is co-operating with an SEC investigation into finite reinsurance sales. Morgan Keegan called the allegations âoutrageousâ and vowed to fight them. Lone Pine and Exis would not comment. The case is not expected to come to court for two years.