Last June Gerald Pencer, the aggressive chief executive officer and a major shareholder of Financial Trustco Capital Corp., completed a surprise $35-million takeover bid for Bay Street brokerage firm Walwyn Inc. Then, in August Pencer personally assisted Walwyn in luring away three top executives from blue-chip investment giant Wood Gundy Inc. By the end of August, 35 people had deserted Gundy for jobs at Walwyn. But last week Pencer, Financial president Kenneth Winger and four of the former Wood Gundy employees were among 10 defendants who received notice that Wood Gundy was suing them for $355 million in an effort to stop further defections and the alleged raiding of Gundy clients. Said Edward Waitzer, a securities lawyer working in New York for Canadian law firm Stikeman, Elliott, of the 35 defections:
“It is a classic case of corporate raiding.”
The lawsuit focuses public attention on a struggle within the securities industry to cope with recent relaxation of government regulations on the kinds of companies that can operate in the securities business.
As well, it illustrates the clash of styles between the old-guard conservatively run investment firms on Bay Street and more aggressive players entering the field as a result of deregulation.
For Wood Gundy, the embarrassing departure of 18 account executives, 15 sales assistants, a trader and a research analyst came at an inconvenient time. Last June 30 Wood Gundy announced that First National Bank of Chicago had agreed to purchase 35 per cent of its stock for $270 million. Industry sources called the deal a highly lucrative one for Wood Gundy and its chairman, Edward Medland, who had a large personal stake.
But that agreement may be threatened by the defections—especially that of former Gundy vice-president and director Timothy Miller, rated in the industry as a top retail stockbroker and who contributed significantly to Gundy’s annual earnings. Medland told Maclean's that the Sept. 30 closing has been postponed for up to eight weeks,
but he added that the delay had “nothing at all to do with the recent defections.”
Still, industry experts said that First National may have grounds for calling off the arrangement because the departures constituted a material change in the business affairs of Gundy. Said Murray Armitage, a director and senior vice-president of corporate finance at Merrill Lynch Canada Inc.: “When you take a high-producing group of people and basically decimate the group, it’s
clearly exceptional.” Indeed, when the Bank of Montreal agreed to acquire 75 per cent of Nesbitt, Thomson Inc. brokers in August, 30 senior bank officers signed a noncompetition clause forbidding them to leave for a competing company for three years.
Complicating matters further, industry sources say that a former suitor for Gundy, the Royal Bank of Canada, is waiting in the wings for a second chance at acquiring partial ownership of the investment firm. Recently, two of its rivals in Canadian banking announced agreements to purchase stakes to form alliances with prominent Canadian securities firms. Said Terence Shaunessy, a banking analyst at Merrill Lynch: “We hear that Royal is desperate.”
Lawyers and investment industry executives have expressed mixed reactions to the lawsuit. Shaunessy, for one, said that there is little sympathy for broker-
age houses because, in the past, employees have enjoyed little job security. Said a senior banking analyst with a competing brokerage firm: “Gundy is sending a signal to the rest of the staff. They better be careful who they are having lunch with.”
But others said that it was a measure of the change in the industry’s ethics. The Investment Dealers Association of Canada, a self-governing industry body, includes in its code of fair practice a section stating that a member should not hire from competing firms for the sole purpose of gaining immediate business. But, said Waitzer, “we are moving from the traditional
clubby, protectionist method of conducting business to having the courts determine where and whether people can move.”
Certainly, Pencer and his Financial Trustco are part of the new breed. From a small base in Calgary in 1980, Pencer—who got his business start in car dealerships, food services and real estate—has built a financial services conglomerate that embraces trust and insurance companies, and has assets of $1.7 billion. Said Merrill’s Murray Armitage: “Pencer has built his company by being aggressive. He is more willing to cross lines and do things than more established firms.” So far, the reaction to Pencer’s dramatic entry onto Bay Street is serving as a warning that the industry is ready to play tough.
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