Thomson Kernaghan clients sue to block merger -- Posted by f_milam at the RB JNOT board
March 18, 2002
OSC asked to block brokers' merger over lawsuits
Thomson Kernaghan deal with Research Capital draws fire
Derek DeCloet and Sinclair Stewart
Financial Post
A group of unhappy Thomson Kernaghan & Co. customers have asked the Ontario Securities Commission to block a proposed merger with Research Capital Corp. unless the brokerage firm puts aside money to settle a string of outstanding lawsuits.
The formal request was lodged last week on behalf of Katharine Brodie, a 65-year old retired widow who is suing Thomson Kernaghan (TK) and its chairman, Mark Valentine, to recover more than $600,000 in losses she claims to have suffered because of "unsuitable" investments."
Neil Gross, a lawyer representing Mrs. Brodie, sent a letter to the securities regulator on Wednesday saying the merger was "prejudicial to the public interest" and that it would leave TK with insufficient cash to settle the various suits.
In January the two firms announced they would combine most of their operations under the Research Capital Corp (RCC) banner to form one of the largest independent brokerages in the country, with an estimated $3-billion in assets and a network of 180 advisors. The TK name, however, will continue to exist through its Nasdaq trading operation, which will continue as a separate entity run by Mr. Valentine.
Because the transaction is not a strict merger, Mr. Gross said he is concerned that this pared-down operation -- which he described as "an eviscerated post-merger . . . remnant" -- may be solely accountable for paying any damages.
"Having regard to the state of Nasdaq trading at the present time, and the uncertain outlook for junior capital markets, it is evident that [TK] will have far less ability to satisfy judgements in the plaintiffs' cases after the core of its operations is removed," he wrote, adding that lawyers for several other plaintiffs plan to send similar letters to the OSC.
"This can be expected to leave an inadequate level of protection for those investors who now find themselves in the position of suing [TK]."
Mr. Gross petitioned the OSC to delay the marriage unless TK sets aside enough cash, either in court or through letters of credit, to cover the several millions of dollars worth of outstanding claims. He also asked the Investment Dealers Association of Canada to withhold its approval on the deal until the OSC issued a decision.
Executives at TK and RCC could not be reached for comment.
Darryl Cruz, a lawyer for a married couple who is also suing the brokerage, sent a letter to the OSC on Thursday echoing these concerns and asking for the regulator to intercede.
Christopher Morgis and his wife, Joanne, are seeking $5.75-million in damages, in addition to legal costs, for alleged breach of contract, negligence, and breach of fiduciary duty.
In their statement of claim against TK and one of its employees, Pat Teggart, the couple alleges that the firm failed to monitor margin limits in their accounts and encouraged "speculative risk taking," including short selling, without first advising them about possible risks. They also contend that Mr. Teggart made unauthorized trades through the Morgis accounts, and that TK cashed some of their cheques without proper approval.
Mrs. Brodie likewise alleges in her statement of claim that neither the firm nor her adviser, Ian Grieve, warned her of the risks associated with investing in a number of stocks and warrants, and made transactions in her accounts without her authorization.
She also maintained that her signature had been forged and $40,000 was improperly transferred from her RRSP account to buy $155,999.25 worth of units in a limited partnership with ties to Mr. Valentine. She claimed that TK ignored her requests to sell the units, which eventually suspended redemptions, and that she has lost the investment.
Mr. Gross said he has not yet received a reply from the OSC. A spokesman for the OSC declined to comment.
ddecloet@nationalpost.com; sstewart@nationalpost.com
