Fairfax plunges on report of asset manipulation

Shares of Fairfax Financial Holdings Ltd. suffered the worst intraday drop since 2020 as the Canadian investment company found itself in the crosshairs of Carson Block's Muddy Waters Research.

The short report by Muddy Waters accuses Fairfax of manipulating asset values to the point that a "conservative adjustment" would reduce its book value by roughly $4.5 billion, or 18% lower than reported.

Fairfax is controlled by longtime chief executive officer Prem Watsa, an admirer of Warren Buffett who has built his company around insurance and value investments. "We see Fairfax as more akin to GE than to Berkshire Hathaway," the report said. 

Brent Lewin/Bloomberg

Block appeared on CNBC before markets opened Thursday to reveal his short position. Data compiled by Bloomberg show that 0.7% of Fairfax's float was shorted as of Thursday morning.

Fairfax shares dropped as much as 14% in Toronto before paring those losses after it released a statement refuting the report. "Fairfax disagrees with the allegations and insinuations contained in the report, and would like to assure all shareholders that Fairfax has prepared its financial statements and reporting in accordance with all applicable accounting principles," it said. The company reports earnings for the fourth quarter on Feb. 15 and will answer questions from analysts the following day. 

The stock was down 11% to C$1,250 in early-afternoon trading in Toronto, making it the third-worst performer in the S&P/TSX Composite Index. It has nearly doubled in the past two years. 

The Toronto-based company has previously sparred with short sellers and sued Steve Cohen and SAC Capital Advisors for allegedly conspiring with other hedge funds to spread false rumors about the company. That case was dismissed in state court in New Jersey in 2018.

"Our initial view is to fade the concerns raised by MW," National Bank Financial analyst Jaeme Gloyn wrote in a research note, adding the short report does not impact earnings. 

"The alleged misvaluation of certain assets is backward looking and MW doesn't remotely attack the $5 billion of operating income we have forecast," the analyst said. 

Fairfax did not respond to a Bloomberg News request for comment Thursday.