U.S. securities regulators are closing a long-running investigation into allegations that two well-known hedge funds conspired to spread negative information about Toronto insurer Fairfax Financial, two people familiar with the inquiry said.

The Securities and Exchange Commission recently sent letters to lawyers for hedge fund managers Steven Cohen and James Chanos, advising them that the agency was terminating an investigation that began in fall 2008, two people familiar with the matter said.

The sources, who didn't want to be identified because the SEC hasn't made the letters public, said the termination letters were sent out a little over a month ago.

It is not unusual for securities regulators to notify parties in an investigation when an investigation is likely to conclude with no enforcement action - especially if the probe has gone on for a long time.

A spokesman for Cohen's $16 billion fund SAC Capital Advisors declined to comment. A lawyer for Chanos' $6 billion Kynikos Associates declined to comment as well. An SEC spokesman declined to comment.

The SEC investigation springs from a civil lawsuit Fairfax filed in 2006 in New Jersey state court, alleging SAC Capital, Kynikos and other traders took part in a so-called short conspiracy. The lawsuit, which is still ongoing, alleges the hedge funds bet against Fairfax shares and then spread negative stories about the company in hopes of driving down the stock price.

In early 2009, the SEC stepped up its investigation when it sent a subpoena to Fairfax's lawyers seeking copies of all emails and trading reports the hedge funds had turned over in the course of the civil litigation.

Last year, Fairfax's lawyer began taking depositions in the civil suit, including lengthy depositions of Chanos and Cohen. To date, only portions of those depositions have been made public.

Fairfax, speaking through its lawyers, declined to comment on the SEC action.

For Cohen, the SEC decision to end its investigation is a second legal win in the Fairfax fracas. In September, New Jersey Superior Court judge Stephan Hansbury dismissed Fairfax's claims that SAC Capital had participated in a short conspiracy.

The judge has yet to rule on motions to dismiss filed by Kynikos and other defendants.

Reuters, along with Bloomberg News, are intervenors in the civil lawsuit, seeking access to millions of pages of documents and depositions that have been sealed in the case. Reuters, for instance, is opposing a motion to keep sealed portions of Cohen's lengthy deposition in the dispute.

(Reported by Matthew Goldstein; edited by Jennifer Ablan and Bernard Orr)

Investment