Ashton Technology Group (fka ASTN)

[MMMARY]

Article on director Valentine

He is uttc director. He set up the financing with his funds and company. He is handling canadian atg operations. He had astn invest in jagnotes, jagfn.

http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=15762686&s=mark%20valentine%20kernaghan

Bay St. brokerage at the centre of perfect legal storm
Thomson Kernaghan besieged by investors, firms it financed
Scott Adams and Derek DeCloet
Financial Post

Mount Sinai Hospital

Stephanie and Mark Valentine have donated hundreds of thousands of dollars to charities.

For a small brokerage, Thomson Kernaghan & Co. and its chairman, Mark Valentine, have attracted more than their share of controversy.

Mr. Valentine's once high-flying hedge funds have plunged in value during the market's recent downturn. As a result, a stream of fund unitholders is clamouring for redemptions the fund can't keep up with. Meanwhile, other investors have taken to the courts against Thomson Kernaghan over what it alleges is stock manipulation and "death-spiral financing" in its use of convertible debentures in its investments.

To top it all off, the police have started an investigation after allegations US$20,000 was taken without explanation from a client's account.

Though it looks like he is fighting fires on a number of fronts, the 31-year-old Bay Street executive writes it all off as business as usual in a down market.

"I don't view it as fires because I understand what is happening in the business environment," he says, sitting in his office on Bay Street. "I know what is happening. They're not fires." Thomson Kernaghan is not a major player on Bay Street, but it is well known for operating in speculative stocks.

Financial documents show Mr. Valentine owned 25% of the firm at one point. He started at Thomson Kernaghan in 1994 and rose to chairman in about five years. So who is he? He declines to talk about himself or to have his picture taken.

What is known is that he moves in Bay Street's fast lane, donating hundreds of thousands of dollars to charities such as Toronto's Mount Sinai Hospital, where the neonatal intensive care unit was named after him and his wife this spring. Also, his father Douglas was is a former Canadian ambassador to Saudi Arabia and Colombia.

What is also known is that his lawyers will be busy.

Chris Morgis, a former brokerage client of Thomson Kernaghan, has taken his complaints about the firm to the fraud unit of the Toronto police.

In a sworn affidavit, Mr. Morgis alleges that Thomson Kernaghan transferred US$20,000 (about $29,000 at the time) out of one of his accounts in January, 2000, without authorization or explanation.

According to documents, Mr. Morgis says he has made numerous attempts to have the money returned, without success.

Several months after the money went missing, Mr. Morgis alleges, he was told it went to an "investment club" he had signed up for in 1999. Mr. Morgis says he then asked for documents about the investment club that would show where the money went, but was denied.

Mr. Morgis's broker, Pat Teggart, has gone on medical leave from Thomson Kernaghan. Mr. Morgis has taken up his complaint with Lee Simpson, Thomson Kernaghan's president and chief executive. But Mr. Simpson "is refusing to provide an explanation for this transaction, and he is refusing to return the US$20,000 to my wife and I. I believe this this money was stolen," says Mr. Morgis in a written statement to police.

Mr. Simpson refused to discuss the matter with the Post, citing a lawsuit filed by Mr. Morgis against Thomson Kernaghan and Mr. Teggart.

That suit is itself unusual, both for the amount of money involved -- Mr. Morgis and his wife, Joanne, are claiming damages of $5.75-million -- and the allegations they have made.

The Morgises had approximately $2.75-million in accounts with Thomson Kernaghan in March, 2000, the month the Nasdaq composite index peaked. The Morgises' equity plummeted to about $800,000 by April -- a 70% drop in less than two months.

Thomson Kernaghan admits in court filings that the Morgises lost that amount. Exactly how that happened is at the core of the dispute.

Mr. Morgis, who controlled all the accounts, concedes that he was an aggressive investor who traded frequently and used margin. But he alleges that faulty compliance at Thomson Kernaghan contributed to his meltdown in the spring of 2000.

Mr. Morgis claims Mr. Teggert advised him to load up on tech stocks, to the exclusion of almost anything else. At one point, 70% of his portfolio was in speculative shares of Research in Motion Ltd., Mr. Morgis alleges.

Mr. Morgis also says Thomson Kernaghan wasn't even able to tell him what his margin position was at times. That allowed him, "encouraged by Mr. Teggart," to continue trading millions of dollars in shares a day, even though his margin debt exceeded the regulatory limit, Mr. Morgis alleges.

For its part, Thomson Kernaghan denies it has done anything wrong, and says the losses are Chris Morgis's fault. "To the extent he suffered trading losses while a client at TK, he is the author of his own misfortune," says its statement of defence.

The only thing Mr. Simpson will say on the case is that he wants to fight it. "We are intending on vigorously defending every allegation that's made in that statement of claim," he says.

- - -

Mr. Valentine's private hedge funds for wealthy individuals were once hot commodities on Bay Street and in wealthy circles. The returns were astonishing, but the funds have run into a wall with the downturn of the technology and small-cap market.

Unitholders, for example, are clamouring for redemptions from a fund called the Canadian Advantage Limited Partnership, or CALP. But they can't get out. The fund's assets have been falling, while redemptions can only dribble out because the investments have plunged in value or are illiquid, according to documents obtained by the Financial Post.

It didn't start out that way.

In January, 1997, CALP had US$1.4-million in assets. In two years, the fund's assets soared to US$21.2-million and the units had returned a remarkable 137.3%.

By September last year, the assets had shot up to US$96.8-million and the units had returned 575.6% since inception.

But the party ended. By January this year, assets had plunged to US$62.5-million, still up 430% since inception, but with further declines expected for February and March, according to documents. Mr. Valentine's other funds have been losing assets too.

The call for redemptions also looks troubling. In communications to unitholders last month, the fund said a redemption pool for CALP and another fund (the two had been consolidated into CALP II) had reached US$40-million, meaning that unitholders wanted to redeem a little less half of the US$90-million in CALP II assets.

Furthermore, the fund was only able to provide a distribution of 0.8% under the monthly redemption program recently. "While we have managed to satisfy some US$11.6-million of redemptions since October, unless we see a marked improvement in market liquidity, we expect cash distributions will be lumpy and limited for the foreseeable future," unitholders were told.

Though the picture looks troubling, Mr. Valentine defends his funds. Many unitholders have over-submitted for redemptions, meaning they don't want all their money out now, but have submitted for more until they see liquidity improve, he said.

"We're continuing to focus this as an ongoing business. There is great upside for the investors. We've had a great track record in the past," said Mr. Valentine, who is president of VMH Management Ltd., which manages CALP. He says he is working on mergers, acquisitions and other strategies to improve liquidity.

In the second to last note to CALP's financial statements for last year, it says there are a number of legal proceedings pending by and against the partnership, dealing with trying to convert the fund's convertible securities. The partnership's management doesn't believe the proceedings will ever be material. That leads to the next hot spot.

- - -

Internet Law Library Inc. of Houston launched a lawsuit against Thomson Kernaghan this year, also naming Southridge Capital Management LLC, Steve Hicks, Dan Pickett, Christy Constabile and Cootes Drive LLC.

According to the statement of claim, Internet Law Library was looking for financing in March, 2000, and talked to Mr. Hicks (a former senior executive with Mr. Valentine at VMH Management) and of Southridge. The result was that Internet Law says it was promised financing by way of US$3-million in convertible preferred shares and US$25-million in equity by a firm called Cootes Drive, which allegedly turned out to be a "straw man" for Southridge and Thomson Kernaghan, the suit says.

Internet Law says Southridge guaranteed it wouldn't sell any Internet Law stock short. That's key because Internet Law alleges that what happened was a "death spiral."

Internet Law alleges that Southridge and Thomson Kernaghan were short on its stock from March, 2000, though they told Internet Law they were not.

Later, Southridge and Thomson Kernaghan manipulated the stock lower by entering low bid prices at the daily close of the market and through other methods, the suit says. The stock fell from US$7 in March to US12¢ in January this year, losing US$200-million in value.

As for the US$25-million equity financing, Cootes delayed it until a provision was triggered that said it wouldn't be provided if the stock fell below US$1.50.

Cootes Drive has fired back a lawsuit against Internet Law, alleging that Internet Law refused to convert 100,000 preferred shares in January, breaching a contract. Mr. Valentine is adamant that his funds and Thomson Kernaghan never took a short position with Internet Law and never take a short position with convertible debentures, ever. "Absolutely not," he says.

Internet Law's suit alleges that the parties it is suing have engaged in similar financing with other companies and the combined losses total more than US$500-million. Thomson Kernaghan was sued at least five times a few years ago over similar circumstances and at least three times more recently.

"All those [five old] cases were successfully defended and won," Mr. Valentine said. "Thomson Kernaghan has done nothing wrong in any of those cases in the past and in the present."





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