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Non-Tech : Ashton Technology (ASTN) -- Ignore unavailable to you. Want to Upgrade?

To: mmmary who wrote (4383)	1/26/2002 9:55:53 PM
From: mmmary	Respond to of 4443

more on that story January 25, 2002 And yet another one bites the dust TK merges with Research Capital, and none too soon Derek DeCloet Financial Post Mark Valentine And so another small independent brokerage disappears from Bay Street. It would be easy to lament the demise of Thomson Kernaghan & Co. Ltd., which will be merged into Research Capital Corp. TK, while small, has a lineage that predates the First World War; it was one of the longest-running independent firms on the Street. More recently, the firm became known for trading and underwriting speculative technology stocks, which is no place to be in this market. So, chalk up TK as just another helpless victim of the tech crash, you know, it's just so sad .... Or is it? Yesterday's announcement by the two firms called it a merger. It looks more like a rescue of a firm drowning in a morass of self-inflicted problems. Rumours began circulating almost two years ago that Thomson Kernaghan was operating on the knife-edge of financial trouble. By last spring, it was under attack on several fronts from unhappy clients. It has faced at least eight lawsuits in recent years over its financing of small companies, most particularly over TK's use of so-called "death spiral" deals. Death spirals are convertible debenture financings in which the debenture holders receive an increasing number of shares as the stock price falls. In practice, they are designed so the financier can profit even if other shareholders get crushed by a plummeting stock. Which is what usually happens. Meanwhile, a private hedge fund run by Mark Valentine, TK's cocksure chairman, was besieged by investors who wanted to get their money out. The fund plunged in value after the tech crash, but was so illiquid that Mr. Valentine could meet only a fraction of the redemption requests. (The hedge fund, too, was being sued because of convertible debentures.) Then there's the sorry tale of Chris Morgis, a former TK client who claims that someone at the firm took US$20,000 from his account without authorization and has never returned it. Mr. Morgis, a wealthy investor who says he lost 70% of his money in two months following the advice of a TK broker, has filed a $5.75-million lawsuit against the firm; it alleges, among other things, that the firm had little or no grasp of the margin position in his account at times -- allowing him to continue trading when his margin debt levels were far above the regulatory limit. Mr. Morgis notified the authorities about the missing money, but the police have laid no charges. TK has filed a statement of defence in which it says it did nothing wrong; it calls Morgis "the author of his own misfortune." But Mr. Morgis's case has prompted an investigation by the Investment Dealers Association of Canada into TK's supervision of the broker, according to documents obtained by the Financial Post. Plenty of brokerage firms get sued and investigated by the IDA. It's part of the business. But Mr. Valentine's obstreperous denials merely added to the impression that Thomson Kernaghan was in turmoil. (He did not return phone calls yesterday.) Perhaps that's why Research Capital made a point yesterday of assuring the Street that the new firm will be a paragon of virtue -- and why the insolent Mr. Valentine will not be joining it. "Research Capital will possess the financial strength to continue making the investments in technology and regulatory compliance now required by investors and regulatory agencies," the company said in a statement. "Our goal is to create an organization ... that will attract the best investment advisors to a culture founded on the highest standards of ethics, integrity and regulatory compliance." These things usually don't need to be so explicitly stated. Who would want to do business with a brokerage firm that aspired to low standards of ethics and integrity? Without question, after the Yorkton Securities Inc. debacle, the cost of compliance is growing. No one feels the pinch more than small independent dealers like Research and TK. The independents are already suffering from a prolonged market malaise and the major banks' rising clout in the securities business. Investors need alternatives to keep the banks honest, and there is still a place in Canada for independent brokerage firms. You could argue, perhaps, that good independents are needed more than ever. But after Yorkton, they've got to play clean. Thomson Kernaghan played with its elbows up. Now it's gone, and it's hard to imagine anyone will miss it. ddecloet@nationalpost.com nationalpost.com