The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  Parker read the letter in a daze. He had known Prem Watsa for a very long time. The Fairfax CEO had in a sense helped hire Parker, having been chairperson of the selection committee that endorsed Parker’s candidacy to become pastor of St. Paul’s sixteen years before. In those sixteen years, Parker had come to know Watsa well. “Very faithful” is how Parker describes him.

  And yet now someone was telling him that the man was a swindler, literally out to abscond with the church funds. Parker never took the accusation seriously, but the fact that someone had bothered to send him this outrageous letter seriously unnerved him. Wherever this had come from, it wasn’t a universe he spent a lot of time in. “All I knew was that something was happening that I knew nothing about,” he says now.

  At exactly the same time that the package sent by “P. Fate” was arriving at Parker’s office, the same documents were being emailed to Watsa himself, this time under the alias “Monty Gardener.” Watsa was understandably rattled. Church activities took up virtually all the space in his life not claimed by his family and his business, and now someone was trying to convince his congregation that he was an embezzler and perhaps a pervert, too.

  Before Watsa could think of what to do, Parker was calling him on the phone, telling him about the letter. “I had to explain to my priest what was going on with the company,” Watsa recalls now. “He’s a good man, but it was hard to explain.”

  The letter to his priest would be merely one of dozens of attempts to intimidate and frighten Watsa’s friends and coworkers, in an effort to isolate him psychologically. Just days after the “P. Fate” letter, for instance, Watsa’s personal assistant, Joan Cheos, who had worked for him from his earliest days in the insurance business, received by email a pair of similar letters from the same “Monty Gardener,” with the same Marty Frankel accusations, only this letter came with a twist: they implied that Watsa was about to be criminally indicted, and so would his assistant, if she didn’t leave the firm quickly.

  “The attached documents are being sent to you out of concern for your unwitting participation in possibly very serious federal crimes committed by Mr. Prem Watsa,” the letter began. It went on to outline a theory that Fairfax was an Enronesque maze of accounting deceptions that would eventually be unraveled by avenging authorities.

  “Please understand that this behavior will not stand,” the letter continued. “… A person such as you has a lot to lose. No doubt you are aware that those that don’t help Prem end up leaving after years of service with the severance afforded those that work at a Burger King drive thru.”

  Note the eerie resemblance between this Burger King comment and Jim Chanos’s line about those who have “no skill set,” for whom the “next stop is driving a cab.” It’s the same sneering, losers-suck sentiment, where the worst thing in the world is to be an ordinary schmuck with an ordinary job.

  “Be aware,” the letter went on, “[Watsa] will be held accountable.”

  Watsa’s assistant soon began to get phone calls in the middle of the night, warning her that she was about to be implicated in Watsa’s crimes. “Get out now,” the voice would say. “Fairfax is a fraudulent company. Save yourself!”

  Joan Cheos was actually sick with cancer during the time she was getting these calls. She would die about a year afterward. To hear Fairfax employees (whose eyes light up with anger at the mention of her name) tell it, the constant barrage of calls and letters frightened her to her core. She especially began to dread the end of the workday, between five and six p.m., when inevitably unfamiliar phone numbers with 212 area codes would ring up and ask for Watsa. “I’m a friend of Prem’s, it’s okay,” the caller would say. Every time she asked for a name, the callers would hang up. This happened repeatedly, multiple times per week, by the end of 2005.

  Strange and upsetting messages began to appear on the Internet. In December 2005 a site called premwatsa.com appeared, showing the familiar Enron logo, only with the “E” changed to an “F” and the word “Fairfax” substituted for “Enron.” Showing an impressively thorough approach, the site designers created two additional mirror sites, a premwatsa.net and a premwatsa.co.uk, in case anyone in England missed the message.

  Then, on a financial website, someone posted a comment about Watsa’s son, who was living in New York at the time. “Anyone know the name of prem’s son?” the message read. “I am 5′2″, 110 lbs, red hair (the drapes match the blinds). I am interested in young indian boys, especially those with their own private jet.… I like dancing under palm trees while throwing macadamia nuts in the air.”

  Meanwhile other employees at Fairfax began to receive P. Fate–style letters and similar late-night phone calls, all from callers who were either anonymous or bearing ridiculous pseudonyms, warning them to resign from Fairfax before the arrests began.

  From there the behavior escalated to people showing up and knocking on the doors of houses belonging to Fairfax employees. Watsa’s own wife, Nalini, was visited at their suburban Toronto home during the daytime by a stranger pounding on her door. The man didn’t say anything, just knocked on the door and left. “My wife went through a very tough time,” Watsa recalls.

  While all this was going on, Fairfax was constantly being besieged with new and unexpected commercial difficulties. A wave of accusations had come from, well, somewhere, many of them having to do with fraud, many of them sent to ratings agencies, regulators, even Fairfax’s own business partners. One particularly damaging set of accusations had to do with one of its American acquisitions, OdysseyRe.

  Someone had sent letters to Fairfax’s auditors at PricewaterhouseCoopers, claiming that there were serious irregularities in OdysseyRe’s accounting dating back four years. The letters went all the way to the top. “They actually sent a letter to the chairman of PwC in New York,” Watsa now recalls. Because of these letters, Fairfax had to take the extraordinary step of delaying the release of OdysseyRe’s annual audited accounting statements.

  To deal with the OdysseyRe mess, Watsa in the early months of 2006 traveled to Stamford, Connecticut, the location of the firm’s headquarters, to help the company’s executives handle the crisis. He was in Stamford for more than ten days dealing with this accounting nightmare.

  On one of the last nights, he exited OdysseyRe’s offices, crossed the street to his hotel, and upon entering his room, met with a surprise. “I came back at ten-thirty or eleven o’clock at night,” he says. “And there was a book, a little package in a plastic bag.… It was on the shelf, you know, the thing next to the television.… The book was called The Tipping Point.”

  The CEO stood there, staring at the book and trying to digest what it meant. The immediate objective facts were that someone had entered Watsa’s hotel room while he was gone and left a Malcolm Gladwell book next to his television. His first thought was to search for some innocent explanation. “I called down to reception and asked if anyone had been let into my room. They said no,” he remembers.

  He stared at the book again. The implication of the Tipping Point title seemed obvious enough, given what Fairfax was going through with OdysseyRe, but the deeper message was clearly that even Watsa’s personal space was no longer safe. For the first time, he found himself genuinely freaked out on a personal safety level.

  “I was a little worried, yes,” he says now.

  Soon the neighbors near the suburban Connecticut home of OdysseyRe’s chief financial officer, Charles Troiano, began to get knocks on their doors. Standing outside were real-life FBI agents, asking where Troiano was.

  In truth, the executive had gone to the Caribbean on vacation. But the FBI had been told by sources it apparently considered reliable that the CFO had fled the country after committing massive financial fraud. When neighbors asked why the agents were asking, they were told bluntly, “We’re investigating him for fraud.”

  The Troiano incident sent Paul Rivett, at the time Fairfax’s general counsel, over the edge. “The FBI staked out Troiano’s house for a w
eek,” he says. “That’s when I knew this was really serious.”

  The young sandy-haired Canadian Rivett was a relative newcomer at Fairfax, a corporation where most of the inner circle had been with the firm, and with Watsa, for twenty years or longer. Rivett, on the other hand, had until recently been an outside counsel, hired by Fairfax for certain specific jobs. He’d helped the company when it wanted to list itself on the NYSE, for instance, and had assisted on some bond financing deals.

  When the company started having troubles, however, Watsa asked Rivett to look into the matter. Almost from the outset, Rivett’s attitude differed from that of the other Fairfax executives. While most in the Fairfax inner circle believed implicitly that the best way for the company to beat back its problems was to perform better, work harder, and not to dignify the attacks by fighting them, Rivett suspected early on that the situation was more serious than those executives knew, and that a response would be needed.

  One of his first moves was to try to gather evidence for his supposition that all Fairfax’s troubles had an organized origin. He began to keep a chronological record of every weird thing that happened to the firm—every late-night phone call, every oddball query from a ratings agency or a journalist, every home visit, everything. In late 2005, he sent out a general letter to everyone in the firm asking them to report to him immediately if anything out of the ordinary occurred.

  “Right away, I started getting responses,” he says now.

  One of the first came from the London-based office of one of Fairfax’s subsidiaries, RiverStone, which had had a curious visit from a person posing as a journalist. The individual managed to sweet-talk his way past security and get into the building, where he met with executives and pressed them for secrets about Watsa and Fairfax, using the ludicrous pretense that Watsa had secretly sold the subsidiary without cluing in the firm’s leaders. When he was finally tossed from the building, the man left behind a card that read “Special Situations Research Consultant, MI4 Reconnaissance.” The phone number on the card, oddly enough, belonged to a real New York hedge fund called Exis Capital.

  Other employees told Rivett about other letters they’d gotten, other calls. On the same day that Parker got the “P. Fate” letter, for instance, someone called Fairfax and left a message: “Tell Watsa that when he goes to jail next year we will visit him and bring him some treats.”

  Rivett himself was the subject of constant prank calls, and here we must digress for an interesting detail: whoever was doing this was customizing the harassment for each of Fairfax’s employees. Although many received calls, each executive got different types of calls. Whoever was responsible for Rivett, for instance, had decided to harass him by reading excerpts of Harry Potter books in each call. Why Harry Potter? Who knows, but that was Rivett’s personal albatross.

  The attorney put the chronology together and became convinced that everything—the analyst reports, the negative press stories, the harassing phone calls and letters, and, most ominously, the apparent new interest in the company by the Justice Department and other regulators—was all connected and part of some kind of organized campaign. “It was the only explanation,” he says.

  Rivett had already been convinced that action needed to be taken after the Troiano incident, but what really spooked the other leaders in the company was an incident that summer. Beginning on June 22, 2006, the firm became the subject of rumors all over the globe, the substance of which was that Prem Watsa had sold his home and fled the company and that officers from Canada’s Royal Canadian Mounted Police were occupying Fairfax’s offices.

  “The call log from that day shows sixty-five different calls to our CFO,” says Rivett. “Everyone from ratings agencies to shareholders to Goldman Sachs, and they were all basically asking the same thing.” They wanted to know if the RCMP was indeed camped out in Fairfax, and if Watsa had indeed sold his house. “They were like, ‘Uh, by the way, is Prem in the office?’ ”

  Rivett, Watsa, and the rest of the Fairfax executives had no way of knowing it at the time, but all this activity had been orchestrated by millionaire and billionaire hedge fund managers with bets against Fairfax, men who had gotten together and hired the aforementioned shadowy fixer extraordinaire Spyro Contogouris to commence a wide-ranging campaign of harassment against the firm. A hundred different antagonists with a hundred different names seemed to be descending upon the firm from all over the globe, but they were almost always just Spyro Contogouris, and a pseudonym, pretending to attack in force. The “P. Fate” letter had been written by one of Contogouris’s buddies, and Contogouris apparently had also dreamed up the late-night phone calls, specifically targeting Watsa’s secretary. The London journalist was Contogouris. He was Monty Gardener. He was everybody.

  Who was this man? The charismatic Contogouris was something like the Zelig of the market-manipulation era, a kind of backroom wet man who ran mysterious errands for powerful hedge fund investors. In a stock market that was increasingly based on movements in public confidence, Contogouris was the perfect operational figure, a man who had no fixed job but was living out a kind of inspired homage to the very idea of a “confidence man.” He was supremely confident in every role he played, and he played a hell of a lot of them.

  Michael Bowe, Fairfax’s lawyer, talks with awe about Contogouris’s ability to answer difficult questions. “You’d catch him in some lie and press him on it,” says Bowe, who would eventually depose Contogouris, “and he’d just start talking more and more loudly, LIKE THIS, LOOKING YOU RIGHT IN THE EYE, and whatever he said, HE WAS ABSOLUTELY SURE ABOUT.” Bowe laughs, remembering. “You’d get so distracted listening to the way he talked,” he says, “you wouldn’t realize that nothing he said made any sense.”

  What little early record there is of Contogouris shows him to have been a kind of celebrity hanger-on in L.A. in the early 1990s, when his brother Chris owned a nightclub called the Mint. Spyro was involved with some charities then, including a camp for low-income kids called the Bony Pony Ranch, where he sat on the board and, according to Bloomberg, “rubbed elbows” with the likes of Lionel Richie and Renée Zellweger.

  Then in the mid-1990s, a Greek shipping magnate named Dimitri Manios hired Spyro to renovate a brownstone property in Manhattan for him. This sent him down two different career paths, one in real estate development and one as the involuntary subject of litigation. He seemed to founder as a developer but proved highly adept at getting sued. The two paths converged in 2002, when his real estate career ended with Manios firing him and his career as a defendant began with the Manios family suing him for having embezzled millions from a series of real estate deals, including several big ones in Houston. In a detail that reveals Contogouris’s mania for multiplicity, for being everywhere at once, the suit accuses Contogouris of boosting money from Manios through no fewer than 130 different bank accounts.

  While Contogouris was in Houston, he seems to have gotten involved with a company called Hanover Compressor, which was based in that city. The company at the turn of the millennium was pushing a scheme to build a natural gas compression barge in Africa and was trawling the country for investors. Contogouris, the man whose last known job had been a glorified houseboy for a Greek shipping magnate, suddenly appeared as one of those “investors,” claiming to have put $3.75 million into the African gas-barge project.

  Where did he get that kind of money? Well, the retiree medical benefits trust of the Pirelli Armstrong Tire Corporation claimed he never had it. The retirees, who claimed they were fraudulently induced to invest in Hanover, sued Hanover and claimed that Contogouris was paid a secret sum of $1 million by the company to make what was actually a fully refundable $3.75 million investment in the barge deal, as a scheme to inflate the value of the project.

  Are you confused yet? You should be. But what happened next begins to put all this background in perspective: Contogouris became acquainted with Jeff Perry, who at the time was working for SAC Capital, and began a new career, in h
igh finance.

  Perry, who out of all the characters in this story seems to be the most universally despised—“a bad guy, a constant compliance problem, incapable of staying on anywhere long” is how one hedge fund manager described him—is unique in that he actually worked for all three of the major funds in this case, SAC, Kynikos, and Third Point, at various times during the Fairfax campaign. According to Fairfax’s lawyers, Contogouris approached Perry when Perry was at SAC and “sold” him inside information about Hanover’s fraudulent barge scheme. He had this inside knowledge to sell, they claim, because he had participated in the fraud himself. SAC from there placed a short bet on the company, a bet that later turned out to be profitable. Contogouris here was playing the role of Bud Fox in Wall Street, selling the one piece of insider information he had—his own life—to get in with the big boys. And it worked.

  Around the same time that Contogouris was making his first contact with Perry at SAC, he showed up in the press, in a news article in The Street, posing as an outraged investor determined to tell the world about the fraud that was Hanover Compressor.

  In the piece, Contogouris claims that Hanover didn’t have access to enough natural gas to make the deal work and knew as much all along. Boldly, he implies in the article that the entire deal was a scam to bilk Hanover’s partners back home.

  “[Hanover] had to know they couldn’t perform and if they knew that, then they must have had other motives for proceeding with the sale of the barge and guaranteeing a 2001 startup date to the partnership,” he told The Street. The same article noted that the SEC had begun to investigate the company, and it’s not hard to read between the lines and see that the investigation might have been instigated by Contogouris.