NEW YORKOne week after restating the results of a reinsurance subsidiary, Fairfax Financial Holdings Ltd. was named in a proposed class action lawsuit charging it with securities fraud for producing a range of allegedly false financial reports since 2004.
Lawyers representing two Fairfax bondholders filed the suit last week in U.S. District Court in New York on behalf of investors who bought Fairfax debt between March 2004 and March 2006.
The complaint, which also names Fairfax Chairman and Chief Executive Officer V. Prem Watsa and several Fairfax officers and directors, alleges that the company concealed the potential impact of improper accounting for finite reinsurance transactions and failed to disclose reserve understatements.
Fairfax unit Odyssey Re Holdings Corp. filed its delayed 2005 earnings earlier this month, restating results from 2001 through Sept. 30, 2005, to correct finite-related accounting errors. The result was a $35 million reduction of shareholders equity as of year-end 2005. Fairfax also filed its consolidated 2005 results, without any restatements.
In a statement responding to the bondholder action, Fairfax said that it "will not comment on this or any similar lawsuits that may be filed against the company, but will deal with them through the appropriate legal process."
Following the Odyssey Re restatement, A.M. Best Co. Inc. affirmed the reinsurer's A financial strength rating along with Fairfax's bb+ issuer credit rating. Standard & Poor's Corp. likewise affirmed its BB credit rating of Fairfax. Chicago-based Fitch Ratings, which has long taken a more critical view of Fairfax, kept its BBB+ financial strength rating of Odyssey and its B+ debt rating of Fairfax under review.
The bondholder complaint charges that Toronto-based Fairfax and its top executives produced a variety of false or misleading statements about the company's finances while it was selling bonds to pay off or refinance existing debt. Specifically, the suit charges that Fairfax:
The value of Fairfax stock and debt securities dropped sharply after the company disclosed March 22 that the U.S. securities regulators investigating certain Fairfax financial transactions had subpoenaed its auditor, New York-based PricewaterhouseCoopers L.L.P., and a shareholder, Glen Allen, Va.-based Markel Corp. Fairfax also disclosed that regulators were investigating Mr. Watsa's suggestion to securities analysts in February that an internal review of the company's finite contracts had found accounting issues only with those at Odyssey.
Fairfax earlier reported receiving subpoenas from securities regulators for information about its finite contracts and transactions in Fairfax stock.
Fairfax per-share price fell 13%, to $113.93, on the day of the subpoena disclosure but had risen to $121.89 as of last Thursday's close.