How bizarre can a deal get? Read on - You wouldn’t believe…

Whoa! What is Canada smoking? It's possible that life could become even more twisted for Fairfax Financial Holdings Ltd. and its reclusive founder, Prem Watsa. Possible, but not very likely.

Where to start? Well, two months ago, the normally media-shy Fairfax created a stir by filing a $6-billion lawsuit against several powerful U.S. hedge funds and a pair of their “shadowy operatives,” alleging they intimidated executives, orchestrated negative analyst reports, and even harassed Mr. Watsa's pastor in an effort to take down the company.

Tuesday, one of these so-called operatives, Spyro Contogouris, added another layer of intrigue to what is already a strange case: In a statement released through his lawyer, he claims he was working on a special assignment for the FBI.

“Without commenting on any specifics, I can confirm that Spyro Contogouris took certain actions with respect to Fairfax arranged by and at the request of the FBI,” Richard Feldman said in an e-mailed statement. “The charges of Fairfax against Contogouris are without merit.” Mr. Contogouris could not be reached for comment. An FBI spokeswoman did not return calls seeking comment.

In its suit, filed in July in a New Jersey court, Fairfax accused SAC Capital Management LLC and other hedge funds of spreading misinformation and conspiring to drive down the price of the company's shares as part of a massive stock manipulation scheme. SAC has flatly denied the allegations.

The Toronto insurer singled out Mr. Contogouris as one of two men, along with Max Bernstein, who it claims were paid by hedge funds to help drive down the price of stocks in which they have a short interest. (Short-sellers borrow stock and agree to give it back at a later date, in essence hoping that the shares will drop in price and they can pocket the difference.)

Got that down , people? Pop-up quiz at noon.

http://www.theglobeandmail.com/servlet/story/RTGAM.20061003.wfairfax1003/BNStory/Business/home”>Fairfax suit takes another twist[GlobeandMail]