The Securities and Exchange Commission is investigating claims made in a high-profile dispute between Canadian insurer Fairfax Financial and a group of powerful hedge funds that the company says used underhanded tactics to drive down its share price, according to people familiar with the matter.

Fairfax alleged in a $5bn lawsuit filed last summer that the hedge funds, including SAC Capital and Exis Capital, spread negative market rumours about the company and attempted to harass and intimidate Fairfax employees, directors and their family members.

Fairfax claimed the activities were part of a co-ordinated effort, dubbed “the Fairfax project”, to crush its shares.

The hedge funds have strongly denied the charges and have accused Fairfax of abusing the legal system to silence critics who have legitimate questions about its complex finances, including its use of controversial reinsurance contracts.

People close to the situation said the SEC was examining Fairfax’s allegations.

Fairfax is also part of an ongoing industry-wide probe by the SEC into accounting treatment of non-traditional insurance and reinsurance contracts.

No action has so far been taken against Fairfax as part of that investigation.

An SEC spokesman declined to comment on whether it was investigating claims made by Fairfax in its lawsuit against the hedge funds. Fairfax also declined to comment on anything relating to the SEC.

SAC and Exis declined to comment.

The exact scope of the SEC investigation, including who the agency might be targeting, could not be learnt. The SEC’s efforts could lead to civil charges or end without any accusation of wrong-doing by anyone involved in the Fairfax drama.

In addition to issues covered in the Fairfax lawsuit, the SEC is understood to be looking at unusual trading surrounding a secondary share offering late last year in Odyssey Re, a reinsurance company majority-owned by Fairfax.

Fairfax claims efforts were made to derail the 9m share offering, including threatening calls to a Fairfax director and to underwriters of the offering at Citigroup and to journalists. All of the calls alleged that Fairfax was engaged in fraudulent activity, according to Fairfax.

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