Update: Before reading further, check out our updated story!

We’re generally allergic to the whole notion of short-selling conspiracies. Which is kind of odd now that we think about it, since we really, really like almost every other category of conspiracy theory.

But we’re not to proud to put aside our allergies (hmm, should have anticipated this whole “allergy” metaphor wouldn’t work out), and bring you this rebuttal to the Financial Times story on James Chanos, the manager of hedge fund Kynikos Associates and the guy often credited with initially calling bullshit on Enron, which “put a large slice of its $3bn in assets on a bold punt that shares in the internet gambling sector were about to go into free-fall” and won big.

Stephen Roman at MidasOracle.org suspects that there may have been something more at play here than good luck or good research—namely, James Chanos’ political connection. Some of the biggest supporters of anti-online gambling legislation have been the big casino operators, and, of course, the Senator from Vegas—err, Nevada—John Ensign. Now according to Roman, Ensign likely knew that the online gambling legislation was likely to be passed through his connections to Senate leader Bill Frist. What’s more, Roman thinks its very possible that Ensign could have passed this information on to Nevada Attorney General George Chanos, who just happens to be the cousin of Kynikos’ James Chanos.

Roman concludes:

We are not believers in information socialism or “illegal insider trading” but of Occam’s Razor. This wasn’t a bold trade based on a research edge – it was a simple information advantage.
FT called the trade a “million-to-one-chance,” it would be - if your cousin wasn’t close with the Senator.

Is any of this true? We have no idea. It wouldn’t be the first time that this sort of “honest graft” has helped make someone rich or richer. And the question of the legality of trading on inside information about upcoming legislation has long been debated. Frankly, the whole chain of information Roman proposes seems unnecessary. Even if it didn’t happen exactly like that—Frist to Ensign to Chanos to Chanos—it wouldn’t be surprising if James Chanos connections to Nevada’s gambling community helped him anticipate the legislation.

Kynikos Associates could not be immediately reached for comment on the story [MidasOracle]
'Million-to-one' gamble pays off [Financial Times]