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Gilman and Pastor, LLP Announces a Securities Fraud Class Action Lawsuit Has Been Filed Against Fairfax Financial Holdings, Ltd. on Behalf of Stock Owners/Investors and Urges Investors to Inquire as to the Class Action Lawsuit Prior to the September 23, 2011 Lead Plaintiff Deadline

Press Release

August 25, 2011

BOSTON, MA – Gilman and Pastor, LLP announces that a lawsuit seeking class action status has been filed in the United States District Court for the Southern District of New York on behalf of the purchasers of Fairfax Financial Holdings Ltd. (“Fairfax” or the “Company”) (NYSE: FFH) who purchased shares between May 21, 2003 and March 22, 2006, inclusive (the “Class Period”).

The Complaint alleges that Fairfax violated federal securities laws by failing to disclose the following facts: (i) the Company’s revenues and earnings were negatively impacted by increased competition in its marketplace, including from companies with lower cost offerings; (ii) a number of significant operational problems existed at the Company that negatively impacted its business; and (iii) the Company had shifted its focus, and a significant amount of resources, away from its core higher education readiness and Penn Foster core businesses in pursuit of unproven projects to the detriment of its business, financial performance and prospects.

As a result of Defendants’ misleading statements, shares of FFH traded at artificially high price levels.  Then on March 22, 2006, Fairfax revealed that the Securities and Exchange Commission (“SEC”) had subpoenaed records of all of Fairfax’s finite reinsurance contracts in the previous year. Consequently, shares of FFH dropped significantly. 

If you purchased or otherwise acquired FFH shares during the Class Period, between May 21, 2003 and March 22, 2006, and either lost money on the transaction or still hold the shares, you may contact Gilman and Pastor by no later than September 23, 2011 to discuss your rights, including as to the recovery of your losses, or to obtain additional information, at www.investment-losses.com, by email at kgilman@gilmanpastor.com or by calling toll-free (888)252-0048.

Gilman and Pastor, LLP is one of the country’s premier national law firms that represents institutional and individual investors in class actions, complex securities and corporate governance litigation.  The firm has been a champion of investor rights for over 30 years and has been recognized for its reputation for excellence by the courts.  You may retain Gilman and Pastor without financial obligation or cost to you, or you may retain other counsel of your choice.

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A Covered Call Writing Strategy Won’t Cover Your Market Losses

Investment professionals routinely encourage investors to engage in a covered call writing strategy. A covered call writing program sells options against stock positions that the investor owns. For example, if XYZ stock is currently trading at $19.50, and the investment professional sells the December $20.00 call for $1.00, the investor may receive $100.00 for every 100 share increment owned. 1 option is the equivalent of 100 shares of stock. So if the investor owned 100 shares of XYZ stock, they would receive $100.00 of income for the call sale.

If XYZ stock trades at or close to current levels, the December $20.00 call may expire worthless, and the investor keeps the full premium and the underlying stock. The problem for the investor in a covered call writing strategy is if the stock moves dramatically up or down. If the stock drops significantly, there is nothing to protect an investor on the downside. If XYZ moves from $19.50 to $15.00 the investor has the $1.00 per share of options premium/income, however, that leaves them with a $3.50 per share loss. The flip side is when the price of XYZ rises dramatically. If XYZ stock rises from $19.50 to $24.00 before the end of December, the investor’s option will be called away by the purchaser of that $20.00 call. As a result, the investor will have sold a stock that is trading at $24.00, for the equivalent of $21.00 a share ($20.00 plus $1.00 of option premium received), or $3.00 less than the market the rate.

Unless the investment professional is recommending this problematic strategy in a wrap/fee-based account, the strategy is actively managed and traded, which ultimately leads to greater commissions charged to the investor. All three examples above will lead to additional trades. If the stock trades in a tight range just below $20.00, the option will expire worthless. The investment professional will likely sell another call option with a different future expiration date.  If the price of the stock drops significantly the December $20.00 call will expire worthless. The investment professional will likely sell another call option. After the price decline, the investment professional will have to go out at least a year or more to get $1.00 in premium for a $20.00 call. This will ultimately cap the investor’s upside for a longer period of time, while still providing no downside protection. The last scenario is when the stock gets called away when the underlying stock price rises dramatically. The stock that is called away at $20.00 generates a commission. Then the investment professional will likely recommend buying another stock and selling a covered call against that position. This recommendation ultimately leads to at least two more commissions.

No matter what direction the price of the underlying stock trades, the investment professional always wins. The only situation that may potentially benefit the investor is when a stock price more or less stays the same. Given how the markets have traded up and down over the past decade, a scenario where market stay stagnant long-term is highly unlikely. Accordingly, recommending a strategy that caps your upside and fails to protect the downside is likely done out of self-interest.

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Slightly Higher Yield Means Significantly Higher Risk

Investors should be wary of investment professionals offering higher yields presented as low risk investments. Due to historically low interest rates (10 year U.S. treasuries recently traded as low as 1.99%), investors seeking income are now routinely offered non-traditional ways to achieve higher income returns. However, these non-traditional investment ideas often fail to have the requisite disclosures regarding the potential risk of loss in such an investment. Investors are being offered proposals from investment professional that include: purchases of income producing stocks, foreign bonds, reverse convertibles, or REITS.

Investment professionals proposing portfolios of income producing stocks should be making significant risk disclosures. Because a stock pays a dividend doesn’t provide any protection to investors beyond the income received from the underlying company. Dividend paying stocks are still subject to market and sector risks. Also, stocks paying substantial yields to shareholders always have the option of cutting the dividend, which will likely cause further price decline.

Over the past year, various European countries have come under significant market pressure, forcing yields to rise in countries such as Ireland, Portugal, Italy, Spain, and Greece. Higher yields come with significant risk disclosure requirements such as credit risk, and price risk for investors. Investors need to be warned that a bond yielding 5 percent versus 2.5 percent represents largely uncompensated risks, particularly if the issuer defaults. Recommending an investment yielding 2 percent more than a highly rated investment, where an investor can lose 100 percent of principal is reckless.

Investors, particularly seniors should run from any investment professional recommending reverse convertibles. These investments are too complex for retail investors. In exchange for an above market yield, investors may receive significantly less than their original investment back. Upside potential for such a recommendation is capped at whatever the yield is, and that yield is only for a very limited duration. Most investment professionals don’t have the sophistication to understand reverse convertibles, let alone make adequate risk disclosures to investors to sell them.

Investment professionals are also offering significant returns through REITS. While REITS pay significantly more than CD’s or high grade bonds, REITS possess substantial risks that the underlying issuer will not have the cash flow necessary to maintain payment of the above average yields. More often than not, income payments will stop altogether, and investors will have difficulty selling their REITS. Most REITS do not trade on national exchanges, and are subject to significant liquidity risks.

When it comes to higher returns, there is no free lunch. Slightly higher returns are not worth significant risks to an investor’s principal.

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Awards & Recognition

The Securities and Investment Fraud Attorneys at Gilman Law LLP have been recognized by numerous leading legal publications:

National Securities Investment Fraud Law Firm