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How financial lawsuits muzzle free speech

RODDY BOYD
Imagine some political group runs an advertisement accusing a politician of misleading statements and covering up his true voting record. Instead of denouncing the attack or countering with a favorable ad, however, the candidate sues the political group for billions of dollars, launching a six-year, scorched-earth legal and public relations campaign.
Even though the legal battle collapses and the candidate spends about $100 million, the gambit works: The politician's future elections are assured, because no rival or reporter dares publicly criticize the candidate lest they be sued.
An absurd example, no? Everyone knows it couldn't happen here, in the home of the First Amendment and a free press. Yet a publicly traded company using its working capital to battle critics in court is an increasingly regular occurrence in the capital markets. Substitute a Canadian insurance conglomerate called Fairfax Financial Holdings for the politician, and you have an excellent
example of the above scenario.
In July 2006, Fairfax sued a group of hedge funds and analysts over what it alleged was a conspiracy to drive down its share price. On Sept. 12 the last remnant of its once far-reaching suit was effectively tossed out of New Jersey Superior Court (though Fairfaxhas said it plans to appeal).
The courtroom debacle was ultimately an aside: For an estimated $100 million in legal and public relations fees over six years, Fairfax's efforts drove its share price up, forced shorts to cover their trades and, save for a few reporters, ceased virtually all media investigation into the company's operations. (To be fair, Fairfax's share price was helped by a turnaround in the firm's insurance businesses and billions of dollars in profit from a remarkably timed 2007 bet against subprime financial companies.)
I am not a passive observer to this situation. It was my reporting that Fairfax said prompted its lawsuit, and several months ago I published a story disclosing new documents that, I maintain, prove the company still has sub-
stantial liability for some tax moves it made in 2003. I also reported extensively on another Canadian company, Biovail Corp, which launched a nearly identical suit in 2006. Biovail met an ignoble fate, eventually admitting to fraud and paying hundreds of millions of dollars in settlements and penalties.
Although Fairfax has much crow to eat, its lawyers at Kasowitz, Benson, Torres & Friedman and its outside PR firm, Sitrick & Co, were relentless in promoting the erstwhile victimhood of Fairfax and Biovail, also a client, to media, regulators and politicians the numbers make clear that suing critics can bear fruit.
Unsurprisingly, Fairfax does not agree with the notion that its lawsuit was primarily designed to stifle critics. Approached for comment, Michael Bowe, the Kasowitz Benson partner directing the litigation, emailed the following statement:
Fairfax sued not for “criticism,” but because people were spreading false claims that Fairfax was an insolvent, Enron-like fraud in order, in defendants' own words,
to “kill” the company. The Court found that there was “absolutely no question” that this intentional conduct caused Fairfax to “suffer ... massive pecuniary/economic loss.” The Court's ultimate conclusion that the law provided no legal redress for such massive losses is unfortunate and incorrect and will, we are confident, be reversed on appeal.
Nonetheless, let's look at the math: The hedge funds sued in the Fairfax case each spent $3 million to $4 million per year on legal fees. They were able to absorb it because they were large. But a small hedge fund likely does not have an extra $4 million in cash flow to pay lawyers and fund investors are loath to invest in smaller funds with ongoing litigation. That creates a powerful disincentive for small-fund managers to speak publicly, even if they believe their research has uncovered significant fraud.
Financial journalists, too, have incentives to keep quiet. The financial media's ability to play a meaningful watchdog role has declined as rapidly as its economic health.