In late July, embattled insurance conglomerate FairfaxFinancial Holdings (NYSE:FFH) filed a $5 billion lawsuit against several prominent analysts and hedge funds -- including Rocker Partners, S.A.C. Capital, and Morgan Keegan -- accusing them of a stock-manipulation scheme designed to drive down the price of Fairfax's shares. It had been relatively calm on the Fairfax front the past few months, but things have started to get really interesting. I'd say it'll be even better than the new 007 movie coming out on Friday.

Another character accused in the alleged stock conspiracy is stock analyst Spyro Contogouris, who Fairfax Financial claims is a key operative for short-selling hedge funds. Contogouris' job, according to the Fairfax lawsuit, involves disseminating "materially false, misleading, and unfounded" information, as well as interfering with Fairfax's business by "harassing, threatening, intimidating, and distracting" its officers and directors.

But in case this all sounds a little too far-fetched and James Bondish, on Tuesday, Contogouris was arrested in New York on wire-fraud charges -- fraud that allegedly led to $5 million worth of losses for his former employer. Ouch. To be sure, these charges aren't related to the Fairfax lawsuit; nonetheless, Fairfax shares rose 10% Tuesday to more than $172 per share -- nearly double the three-year low of $89 reached last June.

Which prompts the question: Are we finally witnessing the long-awaited, highly anticipated, supposed mother of all short squeezes -- shorts covering their position, thus boosting the stock price -- that many of the company's supporters have predicted? No one knows for sure, but the preponderance of evidence would suggest so.

Since the late 1990s, when CEO Prem Watsa and his management team made several missteps in acquiring distressed reinsurers (namely TIG and Crum & Forster), Fairfax has been, and continues to be, one of the most heavily shorted stocks on the New York Stock Exchange.

As of Wednesday, about 4.3 million shares of Fairfax, or 27% of its public float, were being sold short. This equates to a short ratio of nearly 20 days (the short ratio tells us how many average trading days it would take to cover outstanding short positions for a given stock). In other words, short interest of this magnitude may be taken either as a major red flag or a tremendous opportunity, because at some point, all of those borrowed shares will have to be bought and eventually returned. If good news continues to come from the Fairfax story, short sellers might just provide the buying pressure needed to lift the shares even higher.

And as more facts regarding Fairfax's lawsuit are borne out, and while Watsa steadily deleverages the company to try to firm up its financial footing for growth similar to that of the good old days, it looks as though this action-packed thriller could just end on a happy (and high) note for those who are holding for the long term.

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Fool contributor Brian D. Pacampara loves his main squeeze and owns shares of Fairfax Financial. The Fool's disclosure policy is full of fair facts.