SAC Capital Seeks to Disqualify Kasowitz in Fairfax Suit

Steven A. Cohen’s SAC Capital Advisors LP asked a judge to disqualify the law firm that sued it and other hedge funds on grounds the firm’s investigators talked with a defendant who was represented by counsel.

SAC Capital joined a motion brought by Morgan Keegan & Co. to kick Kasowitz Benson Torres & Friedman LLP off the suit because its investigators posed as managing directors of a sham hedge fund and contacted John Gwynn, then a Morgan Keegan analyst, even after the suit was filed and Gwynn had a lawyer.

“The Kasowitz firm continued trying to set up a meeting with Gwynn despite knowing he was represented by counsel and despite an express request not to communicate with him,” according to the July 12 motion that was unsealed July 19.

Kasowitz Benson, based in New York, filed the suit in state court in Morristown, New Jersey, in July 2006 on behalf of Fairfax Financial Holdings Ltd, a Toronto-based insurer.

Fairfax accuses SAC Capital and other hedge funds of conspiring to spread negative information about the company because they were betting its stock price would decline. It seeks more than $8 billion in damages.


Five years after the complaint was filed, the parties have been completing the discovery, or evidence-gathering, stage of the litigation.

The other funds named in the suit, including James Chanos’s Kynikos Associates LP and Daniel Loeb’s Third Point LLC, both based in New York, also joined in Morgan Keegan’s effort to disqualify Kasowitz Benson. The hedge funds, including Stamford, Connecticut-based SAC Capital, have denied Fairfax’s accusations.

The complaint includes a racketeering, or RICO, allegation.

“This meritless motion misrepresents the facts and the law,” Mitchell Schrage, a Kasowitz Benson partner, said in an e-mailed statement. “It is nothing but an effort to distract attention from the fact defendants have no valid defense to Fairfax’s RICO and other claims or the enormous damages flowing from those claims.”

The funds said in the motion that Fairfax wanted to talk to Gwynn because one of the insurer’s accusations is he leaked information to the hedge funds about his negative Fairfax reports before they were published.

‘Strategic Alternatives’

Morgan Keegan fired Gwynn in 2008 for disclosing research on Fairfax to selected clients before publication. He has since died.

Morgan Keegan, based in Memphis, Tennessee, is a unit of Birmingham, Alabama-based bank company Regions Financial Corp. In June, Regions said it was considering “strategic alternatives” for the unit after paying $200 million to settle claims over subprime mortgage-backed securities.

Jeffrey Kaplan and Kenneth Cain, the investigators hired by Kasowitz Benson and its investigative arm, KBTF Consulting & Investigations LLC, now KBTF Group LLC, wanted to meet with the insurance analyst to elicit “admissions damaging to Gwynn and Morgan Keegan outside the presence of their counsel,” according to the motion.

Kaplan and Cain told Morgan Keegan and Gwynn that the sham fund, Blackwood Group Capital Partners, was backed by a wealthy family and that they wanted to talk to an analyst about investing in the insurance sector, according to Morgan Keegan. Blackwood Group was based in Greenwich, Connecticut, the investigators said, according to the filing.

Wealthy Family

“There were no wealthy family members backing Blackwood,” Morgan Keegan wrote. “No one intended to do business with Morgan Keegan. Kaplan and Cain were not investors. They were investigators operating at the behest of the Kasowitz firm and its investigative arm.”

Kaplan, who is a lawyer, and Cain first met with Gwynn at Morgan Keegan’s Memphis office in June 2006, according to the filing.

The next month, before the suit was filed, Kaplan and Cain “isolated” Gwynn in a hotel room at Morgan Keegan’s invitation-only insurance conference in Beaver Creek, Colorado, and asked him to leak research reports to them in return for business from Blackwood Group, according to Morgan Keegan.

Gwynn refused but said “there would nevertheless be a call regarding the research report,” according to the filing.

‘Sinister Twist’

“Kaplan tried to put a sinister twist to this innocent statement, suggesting that it was a promise to provide advance notice of Gwynn’s research,” according to the filing, referring to sworn testimony Kaplan gave in the case.

The investigators continued to contact Gwynn after the suit was filed and after Morgan Keegan and Gwynn’s lawyers told them not to, according to the motion. In September 2006, Kaplan sent Gwynn an e-mail seeking to meet to discuss Blackwood Group business, according to Morgan Keegan.

In his sworn testimony, Kaplan at first denied that his contact with Gwynn had anything to do with the law firm’s effort to get the Federal Bureau of Investigation to probe Morgan Keegan, according to the filing.

“After a break, however, Kaplan changed his story,” Morgan Keegan wrote, and said he tried to meet with Gwynn “at the direction of FBI.”

Kaplan said he contacted Gwynn at the behest of the federal agency, Patrick J. Monaghan Jr., a lawyer for Kaplan at Beattie Padovano LLC in Montvale, New Jersey, said in a phone interview.

“In this case he was an investigator,” and not working as a lawyer, Monaghan said. “What he did was appropriate.”

Monaghan said he is also representing Cain, who has been subpoenaed to testify.

FBI Request

“Kaplan testified repeatedly and clearly that his post-suit e-mail to Gwynn was sent at the request and direction of the FBI,” Schrage, the Kasowitz Benson partner, said in an e-mail. “It was not sent at the direction of anyone at, or for, Kasowitz or Fairfax.”

John Leubsdorf, a Rutgers Law School professor in Newark, New Jersey, filed an expert opinion in the case saying that Kasowitz Benson violated New Jersey legal-ethics rules through Kaplan’s contacting Gwynn after the suit was filed.

Kaplan said in his sworn testimony that he had reason to believe Gwynn was represented by a lawyer, according to the filing.

The case is Fairfax Financial Holdings Ltd. v. SAC Capital Management LLC, L-2032-06, Superior Court of New Jersey, Morris County (Morristown).

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