Mark Valentine didn't like anyone looking over his shoulder.
A sign on his trading desk at Bay Street brokerage Thomson Kernaghan & Co. Ltd. warned "quit hanging around." He installed professional trading systems at his home and cottage for solitary late night trading. He also bought and sold shares through offshore accounts, rarely talked to reporters, seldom allowed photographs and, on at least one occasion, hired a bodyguard.
But the protective walls that the 32-year-old Mr. Valentine took such care to build around his life are crashing down. Securities regulators, Thomson Kernaghan officials, high-powered plaintiff lawyers and media are combing through virtually every detail of his life to explain his role in the latest scandal to shake investor faith in the brokerage industry.
The Ontario Securities Commission alleges that Mr. Valentine engaged in a variety of improper trades that enriched him at the expense of his clients, and the regulator last month temporarily banned him from working or trading in the market. A hearing on whether the ban should be extended is set to resume today.
In a statement issued to The Globe and Mail, Mr. Valentine said: "I am extremely disappointed with the decision of the regulators to commence these proceedings, especially given that I was co-operating with them." His lawyer Joseph Groia added: "The suggestion that he put his personal interests ahead of clients is simply unfounded."
Last month, Thomson Kernaghan suspended Mr. Valentine as the firm's chairman and handed over hundreds of boxes of documents and electronic files to regulators.
South of the border, prominent Texas litigators, including feared Houston plaintiff lawyer John O'Quinn, are gathering evidence to support their claims in U.S. lawsuits against Mr. Valentine and other investors. They allege these investors erased hundreds of millions of dollars of stock market value from junior companies through a potentially devastating tactic known as "death spiral" financing.
These well-connected lawyers are drawing major U.S. media to Mr. Valentine's story. Last month, Forbes Magazine featured an unflattering story about death spirals and some of its investors, including Mr. Valentine. One of Mr. O'Quinn's associates said 60 Minutes recently interviewed him about the financing technique and its practitioners, including Mr. Valentine.
Mr. Valentine and his lawyers have vigorously denied in court filings and statements that the controversial financial practices were improper or illegal, and indeed have successfully defended themselves against some previous U.S. lawsuits relating to death spiral financings.
The spreading scandal surrounding Mr. Valentine is a huge fall from grace for a man who only a few years ago personified the lucky breed of young go-getters reaping massive paper fortunes from the Internet boom.
The story of Mr. Valentine's rise and fall on Bay Street is in many ways a microcosm of the roaring boom and devastating crash of the Nasdaq-listed technology stocks in which he specialized. For a brief shining moment he was rich beyond his wildest dreams, but the stock fortunes he earned for himself and such clients as hockey star Eric Lindros have evaporated, prompting a wave of investigations and allegations of wrongdoing.
By the end of the 1990s, Mark Valentine was easily one of the richest players on Bay Street thanks to his phenomenal success trading red-hot Internet stocks listed on New York's Nasdaq Stock Market. The tall, athletic and soft-spoken trader was generating so many millions of dollars in commissions and profit from his trades that he was able to afford a sprawling home in Toronto's affluent Forest Hill, a beach house in Florida's tony Key Biscayne community, a cottage at Lake Simcoe and a Falcon jet to shuttle family and friends.
According to former Thomson Kernaghan officials, his partners were so grateful for the share of commissions they earned from Mr. Valentine's trades that the firm bought him a Ferrari in 1998 as part of his compensation. The licence plate adorning the sports car was "giddyup," an echo of his frequent rallying call to his small trading team: "Giddy-up, let's get going."
These days, Mr. Valentine isn't going anywhere. The OSC ban prevents him from buying or selling a single share, so he can only monitor markets from his home and cottage trading desks. Apart from a few meetings with friends and lawyers, associates say he is spending most of his time with his wife Stephanie and their three young children.
"Mark is saying he doesn't understand why everyone is doing these things to him," said one friend who recently met with Mr. Valentine. Added another associate: "Mark truly believed that this would blow over and he would be going back to work this week."
Even if he could return, there is almost nothing to go back to. Many of the firm's 200 employees have fled to competitors, and its remaining executives have fended off efforts by some former employees to push the firm into bankruptcy proceedings over what they claim is owed pay.
"Thomson Kernaghan in the next few weeks is not going to exist," Mr. Groia told an OSC hearing last week. Few would have guessed at the changes that would take place at Thomson Kernaghan after Mr. Valentine joined the firm in November, 1994. A mere 24 years old at the time, Mr. Valentine had only two years of experience under his belt as an investment adviser at BMO Nesbitt Burns Inc.
Thomson Kernaghan hired him as broker because of his blue-chip pedigree and ties to some of the broker's rising stars.
The private-school-educated son of Canadian diplomat Douglas Valentine, a former ambassador to Saudi Arabia, Colombia and Yemen, Mr. Valentine's elite background fit like a glove with Thomson Kernaghan's mostly wealthy and conservative clients.
Helping him learn the ropes was Thomson Kernaghan executive Lee Simpson, also a former Nesbitt Burns official, who was climbing his way up the firm's management ladder. Impressed by his sales and trading skills and expertise with emerging technology stocks, a market few of the firm's old-school partners appreciated, the firm quickly promoted him to sell securities to its roster of mutual and pension fund manager clients.
"He was an exceptional salesman almost from the time he sat down here," said a former Thomson Kernaghan executive. "He was quick, very smart and very successful."
He was also very different from the old guard that controlled Thomson Kernaghan.
In the early 1990s, Thomson Kernaghan was majority owned by brothers Ted and Neil Kernaghan, whose father Edward founded the firm in 1949. Edward Kernaghan and his sons had built a respected brokerage offering specialized research on arcane sectors such as power generation, machine and engine makers, and mining firms.
A thrifty Scot, Edward Kernaghan's penny-pinching ways were still evident at the firm in the nineties. Floors at the company's head office at 365 Bay St. were covered in aging linoleum, windows wouldn't open and offices went unheated in winter when an ancient boiler frequently broke down.
Décor wasn't the only thing that Mr. Valentine wanted to change when he arrived in 1994. At the time, Thomson Kernaghan's senior managers were recovering from the tragic death in late 1993 of top salesman Nigel Martin, who died with his wife and daughter when his plane crashed in Lake Ontario.
A gifted stock picker, whose clients included mining executive Seymour Schulich, Mr. Martin owned 15 per cent of Thomson Kernaghan and firmly supported Ted Kernaghan, the firm's chairman. When Mr. Martin died, former executives said, Ted Kernaghan's control eroded. His brother Neil began to sell shares, the former executives said, and up-and-comers such as Mr. Simpson and Mr. Valentine began to acquire stock in the firm to exercise more influence.
The result was a classic power struggle between Mr. Kernaghan's Old Economy ways and the New Economy vision shared by Mr. Valentine and other young executives. Mr. Kernaghan wanted to keep the brokerage focused on reliable resource and manufacturing companies, while Mr. Simpson and Mr. Valentine were convinced the future lay with technology stocks and complex trading tactics.
By 1997, Mr. Valentine was making so much money that a majority of Thomson Kernaghan's partners backed his plans to reinvent the house as a specialized technology brokerage and investment banker. Former partners said Ted Kernaghan signed an agreement in 1997 that saw him sell his shares in stages and retire as chairman in April, 2001.
Mr. Valentine, who eventually acquired 25 per cent of the firm and was named chairman, and Mr. Simpson, who to this day is Thomson Kernaghan's president, wasted no time making changes.
Offices were opened in Calgary and Vancouver and staff more than doubled to about 200. The head office was shuttered and the company moved to a newly renovated building off Bay Street that was decorated with stainless steel, etched glass and postmodern furniture.
In this new setting, Thomson Kernaghan made a name for itself as an astute early picker of technology startups, a financier of needy Nasdaq companies.
The firm's central nervous system was a boardroom-sized trading table stacked with computers and manned by Mr. Valentine's small team of traders and assistants. At the head of the table sat Mr. Valentine, who former co-workers said was so fixated on markets that he seldom left the table for lunch or meetings. Employees outside his team were discouraged from going near the desk and his staff intercepted anyone who tried to interrupt him.
In the hurly-burly of the volatile Nasdaq market, former co-workers describe Mr. Valentine as a calm trader with a computer-like ability to recall the details of hundreds of stock trades. He demanded the same precision from his staff. When Nasdaq traders in New York messed up a stock order he cried "penalty box" and temporarily cut them off from trades. To those who complained, he sometimes sent pacifiers.
Although co-workers describe Mr. Valentine as courteous, he largely kept to himself and seldom discussed his personal or professional life. Adding to Mr. Valentine's mystique was the appearance in the late 1990s of a personal bodyguard. The protection was necessary, he confided to some colleagues, because he had received a death threat. The source of the threats was never explained and Mr. Valentine's lawyer Mr. Groia declined to comment.
A bigger mystery in Mr. Valentine's life was the role he played in death spiral financings. Shortly after he arrived at Thomson Kernaghan, associates say, Mr. Valentine targeted the controversial financings as a key money maker for the firm. Sources close to the firm estimate it participated in more than $2-billion of the financings in the past six years.
Death spiral financings offered much-needed capital to new businesses. In return for taking big chances, investors got securities, typically debentures or preferred shares, that were convertible at a discount into common stock.
Unlike most convertibles, death spiral financings had no fixed conversion price. Instead, the conversion rate was a moving target linked to the market price of a company's stock. The more the stock price declined, the more shares could be collected when the security was converted.
In the wrong hands, these securities can be used to short-sell a stock into oblivion.
A short sale is a bet against a stock. The seller (who does not own the stock and thus is said to be short of it) wins if the price falls before he must buy shares to complete the process.
Normally short sellers run the risk of being caught in a short squeeze -- a trap in which the short seller must chase the price higher and higher to get the shares he needs to cover his sales.
But there is no such risk for a player with a death spiral card up his sleeve. The investor can force the price down through short sales and claim ever-larger numbers of shares through conversion as the price falls.
According to Houston lawyer James Christian, who is working with Mr. O'Quinn on the U.S. cases, the vicious circle of selling contributed to the loss of hundreds of millions of dollars of stock market value at more than 100 companies.
Mr. Christian said he and Mr. O'Quinn currently represent seven companies in lawsuits filed in New York against a variety of financiers, including Mr. Valentine and Thomson Kernaghan. The lawyer said potential new plaintiffs are lining up and he expects another seven companies to launch similar suits against financiers, including Mr. Valentine, within the next month.
In a statement to The Globe, Mr. Valentine said: "Mr. O'Quinn represents a motley crew of investors . . . and when the court looks at what happened, we're going to be successful."
Just who allegedly manipulated the death spiral warrants to depress stock prices and how much of it was initiated by Mr. Valentine and Thomson Kernaghan remains unclear. Many of the orders placed through Thomson Kernaghan were channelled, according to lawsuits and the OSC, through an anonymous web of offshore companies, some of them linked by regulators to Mr. Valentine.
Mr. Valentine, through his lawyer Mr. Groia, disputes that the convertible financings were designed to create short-selling opportunities for investors. Instead, he argues, investors such as Thomson Kernaghan made more money if an issuer's stock rose, because the stock was purchased at a discount on conversion and later sold for a profit when prices rose.
The controversial death spiral financings are only one of Mr. Valentine's many problems. When the Nasdaq began to melt down in 2000, his spectacularly profitable trading strategies began to come unglued. Prices in his trademark Internet stocks swooned as investors fled the market.
At first Mr. Valentine believed he could trade his way out the crisis, telling one reporter in February, 2000, that the "boring drama" would be short-lived.
"He honestly thought he could wave a magic wand and his net worth would be back in seconds," one former Thomson Kernaghan partner said.
But it was not to be. Instead, the firm's heavily weighted inventory of Nasdaq stocks began to plunge in value, and two hedge funds overseen by Mr. Valentine -- VC Advantage Ltd. and Canadian Advantage Limited Partnership (CALP) -- saw hundreds of millions of dollars of value wiped out, according to some unitholders.
By early last year, Thomson Kernaghan had been so wounded by the Internet stock implosion that its partners worried its capital base might suffer irreparable damage. Mr. Valentine's solution, according to some former partners, was to initiate merger discussions with New York-based firm Jefferies & Co. Inc.
But sources said the OSC objected to a proposed merger agreement last summer for undisclosed reasons and the talks fell apart. Earlier this year, Thomson Kernaghan entered into merger discussions with Toronto rival Research Capital Corp.
As Nasdaq stocks continued to plunge, dragging down the value of Thomson Kernaghan's inventory of stocks, Research Capital, according to sources, insisted on increasing protections against potential liabilities and possible capital shortfalls. By March, former officials said, Thomson Kernaghan was in very shaky financial condition.
It is at this point, the OSC alleges, that Mr. Valentine initiated a number of improper transactions to shore up his own accounts to the detriment of his firm's clients.
A central figure in these transactions is Calgary Internet financier Cameron Brett Chell, who, in 1998, paid a $25,000 fine to the Alberta Stock Exchange and agreed to a five-year trading ban in an unrelated case. The exchange alleged that unauthorized trades were executed for Mr. Chell's clients and, in one case, a client's account records were rerouted to Mr. Chell's post-office box.
Later, Mr. Chell co-managed the VC Advantage Fund with Mr. Valentine and controlled the Nasdaq-listed Chell Group Corp., a troubled technology holding company in which Thomson Kernaghan and its hedge funds are major investors.
According to OSC allegations, in March Mr. Valentine moved Chell Group shares between the hedge funds and his own account at Thomson Kernaghan on terms that saw him reap large profits to the detriment of the hedge funds, which were owned by the firm's clients and employees.
In one transaction, the OSC said a Bermuda company linked to Mr. Valentine sold a defunct debenture of an inactive company to the CALP hedge fund for $1.3-million.
The transactions first came to light, according to testimony at an OSC hearing last week, when the funds' portfolio manager Andy Ecclestone complained about the trades to Thomson Kernaghan's senior executives.
After Mr. Ecclestone's complaints went unheeded, an OSC investigator told the hearing, the manager quit in May. According to an investigation report submitted to regulators by Thomson Kernaghan, some of the firm's senior managers reviewed Mr. Ecclestone's complaints but no immediate action was taken.
On May 14, according to the report, Thomson Kernaghan's national sales manager Marty Sims took matters into his own hands and alerted the Investment Dealers Association of Canada about Mr. Valentine's trades. When Mr. Sims advised the firm's management committee the next day about his visit to the IDA, everyone on the committee resigned except for Mr. Simpson and Mr. Valentine.
Over the next month, the IDA and the OSC interviewed several of the firm's senior executives, including Mr. Simpson and Mr. Valentine, according to the report. During that time, Mr. Simpson's wife died after a long illness, employees began to quit in droves and merger negotiations with Research Capital began to stall.
Under heavy pressure from regulators, associates close to Mr. Valentine said, he agreed to a 30-day suspension on June 13, in the hopes that it would clear the way to a merger with Research Capital.
But it didn't work out that way. Five days later, the OSC issued a sweeping order immediately banning Mr. Valentine from working or trading in the market. That same day, Research Capital withdrew from the merger discussions.
With his career and firm in shambles, Mr. Valentine likely faces years of investigations and civil lawsuits as investors and businesses pore over the wreckage to explain how so much wealth could have been wiped out so quickly.
Under siege, associates say, Mr. Valentine still clings to the hope that he will soon return to work. His astounding optimism is reflected in an e-mail he sent to staff the day after his suspension.
"I intend to use this time away from the firm to take a well deserved vacation . . . to work on a number of outstanding issues, and to root for the firm and everyone in it from the sidelines."