Trustee slaps former TK staff with suit

The Globe & Mail
By Jacquie McNish
December 11, 2002

Mark Valentine and 46 former officials at Toronto brokerage Thomson Kernaghan & Co. Ltd. have been slapped with a $76-million lawsuit by the bankruptcy trustee overseeing the firm's liquidation.

In a notice filed with the Ontario Superior Court, court-appointed bankruptcy trustee Ernst & Young Inc. (E&Y) said it is seeking such a large amount in damages, one of the largest ever sought from Canadian brokerage officials, because the "acts and omissions" of TK's directors and executives allegedly contributed to the firm's collapse.

"Each of the defendants owed to Thomson Kernaghan & Co. Ltd. a fiduciary duty or a duty of care, which duties they breached individually or in combination, or permitted or caused to be breached, causing damages for which they are liable," the notice said.

E&Y officials could not be reached for comment yesterday. A lawyer for Mr. Valentine was also unavailable. TK filed for bankruptcy in July as clients and staff fled the 53-year-old firm amid allegations of trading irregularities.

In June, the Ontario Securities Commission alleged that Mr. Valentine, the firm's former chairman, improperly traded for his own advantage a variety of technology stocks listed on Nasdaq's largely unregulated over-the-counter market.

In August, Mr. Valentine was one of more than 50 people arrested by the U.S. Federal Bureau of Investigations as part of an unrelated international investigation. Mr. Valentine has been charged with stock fraud by the FBI and he is currently under court order to remain in Florida.

Mr. Valentine has pleaded not guilty in the United States and has denied OSC allegations.

Other defendants named in the bankruptcy trustee's lawsuit include Ed and Neil Kernaghan, sons of the firm's founder Edward Kernaghan, former chief executive officer Lee Simpson and the firm's former investment banking head Lionel Conacher, a founding partner of Bay Street's newest firm, Westwind Partners Inc.

The Kernaghan brothers, who retired from the firm more than a year ago, could not be reached for comment. Mr. Simpson was also unavailable, and Mr. Conacher declined to comment on the lawsuit.

The Canadian Investor Protection Fund, a brokerage industry insurance plan, injected $18-million in TK to cover shortfalls in customer accounts following the firm's collapse. Sources familiar with the bankruptcy proceedings said the fund has been repaid about $4-million.

Sources said they expect that much of the initial $18-million injection will be repaid.

A report in June this year by the Investment Dealers Association of Canada (IDA) found that internal complaints about some of Mr. Valentine's trading practices earlier this year initially went unheeded by TK's senior management. When the manager who voiced the concerns resigned in May, some of the firm's executives reviewed the matter, but no immediate action was taken, the IDA report said.

Mr. Valentine was suspended from the firm in June and the OSC subsequently banned him temporarily from working or trading in the market.


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