The hottest summer reading on Bay Street this year is a thick pile of legal documents released in mid-June by the Ontario Securities Commission (osc). The papers describe in detail how a wealthy mathematician and a flamboyant bond dealer at Gordon Capital Corp. devised new securities-trading strategies that, at least initially, seemed able to create millions of dollars in profits. However, the deals began to unravel in the summer of 1991, and Gordon told the commission that it ultimately lost $45 million on them. Bay Street’s interest in the case grew even greater last week when a threemember osc panel abruptly refused to accept a proposed settlement of the matter with Gordon. “I’m glad the commission tossed this one back,” said one senior industry executive. “If this had been Gordon’s first offence it might have been OK, but there have been other instances when Gordon went to the edge.”
For Gordon, once one of the most aggressive, respected and secretive investment dealers in Toronto’s tight-knit securities business, the commission’s action signals that the company’s third major brush with the law in the past five years is going to be its most damaging one. Details of the settlement, which had been under negotiation since mid-June by lawyers representing Gordon, its chairman James Connacher and its compliance officer Peter Bailey and the commission staff, were not made public. However, it reportedly called for payment of a cash penalty of up to $4 million plus a 45day trading suspension for Connacher. But after considering the proposed settlement on Aug. 5, the panel, composed of commission vice-chairman Joan Smart, Paul Waitzer, former chairman of Yorkton Securities Inc. and accountant James Brown, rejected it. Said Smart: “Given the facts of this case and the alleged improprieties, we are not satisfied that the proposed settlements are sufficient to satisfy the public interest.”
The offences that Gordon, Connacher and Bailey have allegedly committed relate to trading activities initiated by Patrick Lett, who was Gordon’s client, and Eric Rachar, a longtime Gordon partner and the former head of Gordon’s so-called derivative products department. Lett devised several sophisticated trading strategies. Rachar agreed to carry out the complicated transactions, which began in the summer of 1989 and continued until June, 1991. They involved buying and selling tens of millions of dollars worth of securities and put Gordon’s entire base of capital at risk. In a settlement with the osc on June 17, Rachar, who left Gordon in 1991, lost his right to trade securities in Ontario for 10 years. And Lett, who is estimated to have made more than $30 million from the transactions, was ordered to pay a $280,000 fine.
In the past, the commission usually prosecuted only those directly involved in the offending transactions—in this case just Rachar and Lett. But this time, it also pursued the firm itself, and the two senior executives, Connacher and Bailey, for failing to properly supervise an employee. Rachar and Lett both told the osc that other senior Gordon employees were fully aware of their transactions and encouraged them. Rachar said that “the Gordon culture sacrificed compliance (with the law) for profits.”
There have been two other major investigations of Gordon by the commission. In 1991, the osc found Gordon “grossly derelict” and imposed an unprecedented 10day trading ban on the company after one of its stock traders bought so many shares in a small auto-parts maker that he “inadvertently” took over the company without notifying regulators as required. Then, last December, after an investigation that began in 1987, the osc imposed a lifetime trading ban on Gordon’s former head trader, Frank Costantini, for trading on inside information. In that case, Gordon was not held responsible. But now, the osc’s patience appears to be exhausted. Gordon is being called to account for its practices and Bay Street is waiting in suspense to see how the last chapter of this thriller will end.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.