A little more than 25 years ago, a handful of partners at Gordon Capital Corp. filed into a modest office on the 54th floor of the Toronto Dominion Bank Tower. It was 6:30 p.m., the end of another frustrating day, and no sooner had the first bottle of Scotch been cracked than the kvetching started.
Gordon had been around since 1969, but it was still viewed as a pariah, a low-caste interloper among pedigreed brokerages like Wood Gundy, McLeod Young Weir, Dominion Securities and A.E. Ames. These firms had gotten fat by cornering the lucrative business of underwriting stock sales; they were the quintessential old boys' club, and they weren't about to admit Gordon as a member, much less its brazen CEO, Jimmy Connacher.
As the drinks flowed, the Gordon bankers discussed an upcoming deal for an energy company called Canadian Utilities, and groused that they would likely be shut out of that one too-or, worse yet, insulted with a sliver of just 2% or 3%. "And then someone said, 'Why don't we just buy the goddamn thing?'" recalls Derek Nelson, one of the senior partners at the firm. "There was a long silence, and he went on: 'Why don't we just make a bid? We're block traders, and this is just a big block.'"
No one realized it at the time, but this sodden conclave was a revolution in disguise; it had hatched the "bought deal." Before the Gordon brainstorm, a company issuing new stock or debt would sell it to investors through a syndicate of brokerages and pay these firms a handsome fee. Gordon turned the model on its head: It promised clients it would buy the entire offering at a lower commission, and then assume the responsibility for finding buyers.
The bought deal would permanently transform the way Canadian companies raise money. It would also send Gordon on a turbocharged course, replete with sybaritic excesses, and propel the Big Five banks' takeover of the brokerage business on Bay Street.
The Canadian Utilities mandate, which Gordon won, was initially seen as a novelty-at least by the blueblood brokers, who hated the idea of taking on more risk for less reward. But the old guard were powerless to stop the momentum the idea soon gained. Less than two years later, in 1984, Royal Bank of Canada awarded a $228-million preferred-share bought deal to Gordon, and the innovation went mainstream.
"With RBC condoning the bought deal and doing it with Gordon Capital, the perception was: We were there," says Connacher, an irascible sort who was nicknamed the Piranha. "We had arrived. This was the Royal Bank, the premier bank, which for years had used Wood Gundy. People were amazed. Even as we speak [the bought deal]is the basis for probably 90% of all underwriting done in Canada."
"It changed Bay Street immensely," adds Ron Goldsack, a onetime race-car driver and Gundy alumnus who joined Gordon in 1972. "The banks fought the bought deal for five or six years, because they were risk-averse. We were open warfare."
They were open everything. The RBC deal may not have vaulted Gordon into the establishment-it was far too much of an iconoclast for that to ever happen-but it made the firm respected, if not feared. By the mid-1980s, Gordon was raking in cash and its culture was accelerating. It quickly dispensed with the ponderous and hierarchical ways of the buttoned-down firms, ushering in the era of the risk-taking, thrill-seeking, fast-living investment banker.
Racy stories-perhaps apocryphal and certainly not involving anyone named in this article-are legion. Two secretaries received breast implants as a bonus one year. A stripper, dressed as a nun, was brought into the office to entertain a partner. Cleaning ladies caught certain staff engaging in furtive bathroom trysts-that is, when they weren't sneaking off for a dalliance on the firm's sailboat, G-Force. The company even hired a butler, Basil, who once strolled into the corporate finance department, dangling a belt someone had "lost" in the boardroom.
There was, in other words, a part of Gordon that was Animal House on Bay Street-a hard-working, hard-living fraternity that changed the rules of the game as it went. And sometimes broke them. "Even though we worked hard, it seemed a bit like a constant party," remembers one high-ranking Gordon official. "We were arrogant. We thought that we could beat the hell out of any competition. And we did, for a long time."
But the party couldn't last.
From the inception of Gordon, its partners knew they would have to do something different in order to survive. Most of them had worked for the big brokerages, and had had their fill: They dismissed the big firms as staid and complacent.
So they set out to fashion a company that was the opposite: one that was inclusive, that rewarded aggression, thwarted tradition and functioned as an eat-what-you-kill meritocracy. "We were very ingenious: We wouldn't say no," says Connacher, himself a Gundy defector. "We were outside the box all the time. There always had to be a way of doing something, and we'd find it. And the competition was smug."
The bankers who worked at Gordon were partners, not employees, and the group would gather around a boardroom table, every morning at 7:30 sharp, in a set of glass-walled executive offices known as the Fishbowl. Gordon prided itself on having the earliest meetings on the Street. If you were late, or read a newspaper instead of paying attention, you were fined $50. (The money was put aside for the Variety Village charity.)
In the firm's infancy, the senior directors assembled in the boardroom every Friday for a properly catered luncheon, with good wine. In the 1980s, this tradition was extended to include the entire firm, administrative assistants and all.
Eventually, when this practice became too expensive (legend has it the partners almost choked when they discovered the shepherd's pie was being handmade with ground sirloin), the end-of-week gatherings moved to Rodney's Oyster House. For the contingent that attended, the lunches often turned into afternoon drinks, and dinner, and evening drinks, and, well, more salacious things. For a time, among the photographs hanging in Rodney's men's room were two of topless women cavorting in the bar. Both were employees of Gordon.
The guiding philosophy was to keep the team together, whether at work or play, enabling them to continually share ideas. Basil brought drinks around in the afternoon so traders and bankers wouldn't have to leave their phones. For a time, Connacher experimented with a tab at the bar above Gordon's offices, but scuttled the idea after his staff rang up a $3,000 bill in the first week. Too many partners returned to work "sozzled," in the words of one former executive.
There was also the famous story of the partner who was told to show up for his job interview at a suite in the King Edward Hotel. When he knocked on the door, he was greeted by a half-naked Gordon official whose body only partially obscured the naked women behind him. "Come on in," the official told him, not missing a beat.
The partner, who got the job, later described the scene to colleagues as something that brought Caligula to mind.
"There were two sides of Gordon," remembers one employee. "There was the aggressive side, the partying and womanizing. And also there was this great creative force."
Each informed the other. Gordon's unique culture attracted a certain kind of banker: aggressive, willing to take risks, entrepreneurial.
When the firm opened, it immediately targeted a neglected patch of the capital markets: the major institutions, like pension funds and other asset managers, that wanted to move large chunks-blocks-of stock. "In those days, Wood Gundy didn't even have the phone numbers for half [of these institutions]" scoffs Connacher, who is now retired, splitting his time between Toronto and Vermont.
Mastering the block trade was a crucial first step in pioneering the bought deal; the only way Gordon could pull off the latter was through its careful cultivation of big institutional investors.
And even then it was hard. The breakthrough RBC deal was a risky proposition even by Gordon's cowboy standards. Whatever shares the firm couldn't move, it would be forced to own, dealing a potentially crippling blow to its capital position. So a dozen summer students were ordered to phone every taxable corporation in the country to pitch the shares. "It took a while, but that was a big success," says Jeff Green, who joined the firm in 1980 and became its president eight years later. "We basically changed the way businesses were financed in Canada. A small firm was dominating the lucrative side of the business."
The RBC offering merely emboldened Gordon. Once, in an attempt to drum up business, the firm sent a proposal to Barrick Gold, outlining why it should mount a hostile takeover of rival miner Placer Dome. Then someone figured it would be best to hedge the firm's bets: Why not send a proposal to Placer, warning it could be a takeover target and encouraging it to make its own bid for Barrick? That way, if either took the bait, Gordon would be assured a nice advisory fee.
Alas, in their enthusiasm, the bankers mixed up the pitches: Barrick chief Peter Munk found himself staring at a proposed takeover of his company masterminded by Gordon. According to some partners, Munk never spoke with them again.
And then there was the time Gordon executed the first major program trade, in which clients trade a basket of stocks in an index. Gordon's head trader, Frank Costantini, was in hospital recovering from a heart attack. This would have been a major obstacle for most firms, but not Gordon. Costantini's colleagues propped him up and patched him in to the office by conference call, so he could direct activities from his bed.
"There was no firm like it. And there probably won't be another one like it," says Brad Griffiths, who left in the mid-1990s to start what is now GMP Securities. "It was tough to get into and tough to get out. Hotel California."
Nobody wanted to get out. For one thing, the firm was raking in gobs of money, and partners were allocated not mere commissions, like other shops, but a share of the profit.
By the mid-1980s, thanks to its savvy block trading, its bought deals and its wooing of the institutional market, Gordon accounted for 15% of the daily trading on the Toronto Stock Exchange. Some days, that figure climbed as high as 70%, and, at one point, the firm even set a record for trading on the American Stock Exchange, a junior alternative to the New York Stock Exchange.
Yet this was a firm that, at its peak, had barely more than 100 employees. For a while, no one knew how it could shoulder the massive risk of a bought deal. Within Gordon, the secret was contained in the acronym ATS, or "across the street" -a reference to the offices of Brascan, the sprawling conglomerate run by Jack Cockwell and backed by the Bronfmans.
Connacher had been good to Cockwell, helping him with huge stock trades involving Labatt, Noranda and London Life. Cockwell discreetly reciprocated by buttressing Gordon with capital when the firm was pursuing bought deals.
While some regarded Connacher as a skilled, intuitive trader, others did not. But there is no disputing his mastery of relationships. And not just with Brascan. In 1986, Quebec's powerful Desmarais family was preparing to take Great-West Lifeco public through a stock offering. Alumni of the firm say the family promised Connacher he could lead the IPO on one condition: that he hire resigning Liberal MP Jean Chrétien as a part-time consultant.
A decade later, when Chrétien had become prime minister, Gordon was one of three firms hired to sell a massive piece of Ottawa's stake in Petro-Canada. Reform MP Chuck Strahl charged that the company won the job for its connection to Chrétien rather than on its own merits. The accusation was denied by federal officials, who said Chrétien had nothing to do with the decision.
As more and more clients flocked to Gordon, older firms had little choice but to follow its lead. Yet many of these independent brokerages lacked the capital to purchase bought deals, which had grown in both size and popularity. Most of the brokerages, such as Wood Gundy, McLeod Young Weir and Dominion Securities, eventually sold themselves to the banks, which had the balance-sheet strength to back such large deals.
While the shift in power on the Street was clear enough, it's difficult to pinpoint when Gordon began to unravel. Some say it was in the late 1980s, when Connacher was crowned the King of Bay Street by a Toronto newspaper: a rare bit of individual publicity that foretold the demise of the firm's egalitarian culture.
Or maybe it was later, around the time of the annual partners' dinner at SkyDome in 1992, when the famously intuitive Connacher, sensing a mutiny, stood before his black-tied troops, called them a "bunch of [insert 11-letter expletive] and then abruptly left.
Still others insist the seeds of Gordon's downfall weren't really sown until a year later, when the Ontario Securities Commission suspended Connacher from his job for three months, and slapped the firm with a record $6-million fine.
The regulator alleged that Gordon misstated its financial position, and said Connacher should have known that the firm left itself undercapitalized when it lent a massive amount of securities to a Toronto speculator. The suspension came just a year after Costantini, the head trader, was banned from the brokerage industry for life after an investigation into front-running-trading with advance knowledge of how clients intend to buy and sell stock.
"That sort of marked the end of Gordon," one former employee says of Connacher's enforced vacation. "It kept going, but it just wasn't ever the same."
Although Connacher returned, the famously close-knit firm was riven by dissent. It had become punch-drunk, lurching toward irrelevance. "Like at any other firm, at some point, the fact is, people start hogging the pie," shrugs Goldsack, who is now retired.
During a management overhaul, Gordon's partners couldn't agree on who should take the helm. So they appointed a triumvirate of CEOs, each from a competing business line: a "disaster" in the words of one former executive.
Next came a failed rescue attempt by Richard Li, the son of Hong Kong billionaire Li Ka Shing, who bought majority control of Gordon in the fall of 1995. The scion installed his own executive team, and watched the firm disintegrate. By 1998, with the company little more than a carcass, bled of its best talent, Li sold out to HSBC Canada, and Gordon officially disappeared.
But its influence didn't. Gordon spawned a remarkable number of brokerages, and many of its alumni went on to hold prominent positions on Bay Street. As various partners deserted amid the problems of the mid-1990s, they helped found GMP Capital, Newcrest Capital (which was sold to TD), Westwind Partners (since sold to Thomas Weisel Partners) and Paradigm Capital. Others, like Ron Lloyd, went on to run the Canadian arms of foreign dealers like Merrill Lynch and Credit Suisse.
So strong was the Gordon culture that even today, alumni seem hitched together like brothers in arms: This wasn't just a firm, but a formative experience, a shared rite of passage that will never be reclaimed or duplicated.
That bond was so strong that many remain wistful about their time at Gordon, despite the bitter feelings that stem from its demise. "We really blew it," admits Green, the former president, who founded Paradigm and is now a managing partner at Jovian Asset Management. "How could we blow this thing? Because we couldn't keep the people together. We lost a sense of partnership. It's kind of sad. I shed a tear."
Former partners say the firm was ultimately undone by its success, that when the money began to flow, it corroded the sense of camaraderie. Ego trumped equality, and the firm was factionalized, with many partners questioning Connacher's leadership. "I think we could have morphed into a respectable, mainline firm," says Nelson, the former senior partner. "But no one wanted to go there. Everyone wanted the old days back."
Connacher, not surprisingly, sees Gordon's downfall a little differently. "I think the real crime of it was there wasn't one single younger partner who was capable of running it," he says. "We had people who in their own right were excellent, but all of them had skeletons. Everyone was an alpha. It was like keeping the cats in the pen.
"They'd walk over anything to get a deal done."
Where Are They Now?
Gordon Capital alumni prominent among Bay Street's elite
chairman, Coxe Advisors; former global portfolio strategist, BMO Capital Markets
CEO, Crystallex International; founding chairman, Toronto Waterfront Revitalization Corp.
billionaire; member of the Asia Pacific Economic Cooperation Business Advisory Council
BANKERS/ MONEY MANAGERS
head of institutional trading, TD Securities
head of trading, Genuity Capital Markets; former head trader at CIBC and HSBC
former head of sales and trading at National Bank Financial
managing director, Thomas Weisel Partners (Canada)
retired head of trading, TD Securities, Newcrest Capital
head of equity sales and trading, National Bank Financial
director of Thomas Weisel Partners (Canada); former chairman, Westwind Capital
CEO, Raymond James Ltd. (Canada), until June of this year
deputy chairman, Thomas Weisel Partners (Canada)
managing director, RBC Capital Markets
chairman, Bankers Petroleum; former CEO of Yorkton Securities
managing partner, Jovian Asset Management; founder and former CEO, Paradigm Capital
co-founder, Griffiths McBurney & Partners (now GMP)
chairman and CEO, Credit Suisse Securities (Canada); former president and COO, Merrill Lynch Canada
head of investment banking (Canada), Canaccord Capital
partner, Genuity Capital Markets; former vice-chair, CIBC World Markets
managing director, corporate finance, Paradigm Capital
managing director, GMP Securities