Hedge fund shorts Fairfax, alleges asset value manipulation

(Reuters) — Short-seller hedge fund Muddy Waters has placed bets against the shares of Canadian insurer Fairfax Financial, its founder Carson Block said Thursday, alleging manipulation in asset values.

Property/casualty insurers like Fairfax had until recently struggled since 2017 when they recorded huge losses due to billions of dollars in payouts on catastrophes.

“This underperformance pressured Fairfax into becoming aggressive in pulling accounting levers starting in 2018,” Muddy Waters said in a research note.

“We find that Fairfax has consistently manipulated asset values and income by engaging in often value destructive transactions to produce accounting gains.”

Fairfax could not be immediately reached for a comment.

Short sellers make money by betting that the price of a security, such as a stock, will decrease.

Muddy Waters also alleged that Fairfax carried several of its investments at “unrealistic” carrying values. According to the hedge fund, the market value of its shares in Indian outsourcing provider Quess Corp. was $477.2 million, while Fairfax continued to carry it at about $1 billion.

In 2019, Fairfax raised its stake in Quess to over 32% after acquiring more than 256,000 shares. As of Sept. 30, Fairfax carries the Indian company at an 87% premium to its market value, Muddy Waters said.