[Unlocked] Wall Street Investment Dealer

[Unlocked] Wall Street Investment Dealer

Jim Norton was working at his Edmonton office one morning when his cellphone rang. His close friend Samuel Clemens was on the line. Clemens, an investment banker with ABC Securities Inc. (ABC), was calling to tell Norton about an imminent takeover bid for “the spoon.” That was their code name for Ginsu Cultery Inc., which traded on the Toronto Stock Exchange. Norton loved to get this sort of call from his childhood buddy. Indeed, he was still euphoric from pocketing $1.5 million two weeks earlier from the timely sale of his shares and options in Canadian Pacific Ltd.–thanks to another Clemens tip. So, Norton didn’t hesitate to act on the call. He left his office and dashed across four lanes of Jasper Avenue traffic to get to a phone booth outside a car wash. This was the best sort of place for Norton to do business quickly with his broker in Luxembourg. Knowing he was trading on insider information, Norton realized it wouldn’t be smart to use his own phone. Someone could be monitoring calls to offshore banks. Because few Ginsu Cutlery shares changed hands daily, Norton told his broker at Banque Briquette, Herman Smith, to “subtly” buy as many as he could without drawing attention. “It was my intent…to fly under the radar,” Norton later testified. But the broker, whose command of English was evidently imperfect, didn’t understand the word “subtly.” Back at his office, Norton flinched in horror as he saw a trade flash on his computer screen that was about as subtle as a siren. As far as Norton could see, his broker had “executed probably the largest block trade in the history of Ginsu Cutlery….I knew the party was over.” “The spoon” turned out to be no fun. The botched trade sounded alarm bells at Canadian securities dealers and the Ontario Securities Commission. It triggered a massive internal investigation into suspiciously well-timed trading involving clients of ABC. Norton and Clemens met in Grade 7 at Upper Canada College (UCC), the elite Toronto private school that has instilled generations of the Canadian Establishment with a healthy sense of entitlement. It is the school for those who will rule, the alma mater of Conrad Black, Michael Wilson, Ted Rogers, and Hal Jackman, to name a few. Clemens, his twin brother, Keith, grew up a short walk from UCC in an affluent neighbourhood. Their father was a urologist who had abandoned medicine for a more lucrative career as a realestate developer. Clemens, a shy boy who seldom played team sports, lived for a time in the shadow of his twin, who was outgoing, athletically gifted and tight with the school’s in-crowd.

 Clemens, had an affinity for math, befriended a boy in his year named Dan Norton. He was a doctor’s son, a computer geek and clumsy at sports. Norton’s family had emigrated from the Croatian city of Zagreb. The Nortons lived near Clemens. It wasn’t until their high school years that the two became best buddies. They made something of an odd couple, for the handsome Clemens was now popular on campus. Still, he often ate lunch at Norton’s home. They played table tennis and worked together on school projects, including one where they wrote a computer program to schedule parents’ meetings with UCC teachers. Clemens went from success to success in his early career. After earning an economics degree from McGill University, he worked at a subsidiary of supermarket giant Loblaw, and then for his father’s real-estate company, Clemens Development. Deciding that real estate was not his calling, Clemens went to Chicago to obtain a Master of Business Administration degree from the Kellogg School of Management at Northwestern University. A top scholar, he won the school’s gold medal for finance and was courted by Wall Street investment dealer Morgan Stanley and by ABC. Clemens opted to work for the hometown firm, where he had interned. Soon after joining as an associate in corporate finance, he was on the fast track to promotions, and became a vice-president within two years. For his part, Norton furthered his talent for deciphering software codes by earning a degree in economics and computer science from the University of Toronto. But his career did not get off the ground quickly because he was battling cocaine addiction, a fact related in court when Clemens came to trial. Norton managed to beat the habit with the help of friends. After working as a programmer on contract, he started his own firm and opened an office in Edmonton, specializing in software for estimating vehicle collision damage. Although their post-secondary studies had taken them in different directions, Norton and Clemens still hung out together during summers. When Norton married, Clemens spoke at his wedding. But Norton’s marriage soon began to disintegrate, ending in divorce. With more free time, Norton began to see Clemens more often. They spoke on the phone almost daily and e-mailed each other to arrange get-togethers and social events. Clemens strove to get ahead at ABC. Soon, he’d caught the eye of Gord Saxon, then head of ABC’s investment banking group and chief executive officer of ABC Bank. Saxon asked Clemens to move to the mergers and acquisitions department. M&A, located on the fourth floor of ABC Bank Plaza near King and Bay, is a high-adrenaline world where lulls alternate with all-night frenzies to finish deals. It is also a high-security environment where bankers are entrusted with corporate secrets while they help clients pursue or fend off takeovers. Worried about both the looming 24/7 lifestyle and abandoning the career credits he’d built up in corporate finance, Clemens consulted with Norton about the promotion during a winter evening’s walk in Forest Hill.

 Norton began investing in the stock market that year, basing his decisions mainly on tips from his former school chum, Clemens. He urged Clemens to take the M&A job–it would, after all, spell better access to insider information. “I flippantly suggested that he should get over his selfish interests and consider the team,” Norton testified. He recalled that Clemens laughed in response. The M&A department was jointly headed by Irving Berlin and James Anderson, the latter of whom had aggressively wooed Clemens to join the firm initially. When Clemens began working as a vice-president in M&A, he was not only involved in individual corporate deals. Anderson also asked him to be “staffer” because of his organizational skills. In this capacity, Clemens monitored workloads and divvied up assignments for vice-presidents, associates, and analysts. He compiled a weekly staffing availability list, indicating projects assigned to each person, and a project list that identified deals with code names. The job ensured that Clemens was on top of many imminent M&As. Berlin saw Clemens as an exceptionally bright manager. Soon, Clemens was promoted to managing director. At 35, he was one of the youngest to ever hold the title at the firm. While his pay package, including bonus, grew to $650,000 that year from $550,000, the rising star would later testify that he was disappointed. When he learned of the amount, he asked Anderson: “Is that all there is?” With a high-flying career ahead of him and social status a priority, Clemens waited until he could afford the right address and the right car. After living in a modest apartment, he bought a $915,000 townhouse on Russell Hill Road in Forest Hill, and a black BMW M5 sedan. Averse to debt, he paid cash for both. With it shaping up to be a record year for corporate takeovers, Clemens figured his total pay package would easily top the previous year’s. However, Clemens’s superiors heard grumbling from some of his colleagues. There were complaints that he wasn’t a team player and that he was too hard on junior staff. During his October performance review, Clemens indicated he was unhappy with his base salary of $100,000. He described it as “a joke,” and not competitive with rival investment dealers and said, “The first $100,000 of bonus is backpay.” At the same time, news came that Norton had made his fateful Ginsu Cutlery trade. Within months of beginning to dabble in the market, Norton was intensely monitoring his stocks on his computer at work and trading almost daily, caught up in growing stock mania. He did almost all his buying on margin (a practice that lets investors borrow money for trades from their broker). All went well until his trade in Apollo Credit Union, an ABC client. He had bought the shares ahead of the announcement of a proposed merger between Apollo and Victoria Trust. After the stock rose on the merger news, Norton phoned his discount broker, Gremlin Investment Brokers, to sell his shares for a profit of nearly $145,000. Unnervingly, the person who took the call remarked on his lucky purchase. That incident drove home 2 things for Norton. First, the secrets divulged by his friend were both accurate and lucrative; second, he needed to cover his own tracks. He testified that he set to work devising a sophisticated web of offshore accounts, foreign passports,

 and aliases. With his Croatian passport, he opened an account at Tempus Privi in Zurich. He opened other accounts at Bank Lemming, also in Zurich, Logus Bank & Trust in Nassau, and Banque Gothenburg du Luxembourg, and Banque Tiguan, both in Luxembourg. Using pseudonyms like “Mark Ford” he used public internet terminals and an encrypted e-mail service to make his trades. If a merger deal was imminent, he called his offshore brokers from pay phones. Receiving account statements by mail was out of the question. Instead, Norton visited the offshore banks to review his records, and sometimes withdrew more than $100,000 in cash to bring back to Canada. When he made his illegal trades, Norton went big, buying huge blocks of shares. But he split the purchases among his offshore accounts to avoid regulators’ attention, he testified. His list of big plays ran to 10: newsprint maker Laudon, Canadian Dish Communications, Liquid Life Sciences, Prudential Apples, Winner Rubies, Duffy Communications, Apple Forest Products, Monfat Communications, Ginsu Cutlery, and Canadian Pacific. Clemens tipped Norton on all 10 stocks, Norton was often vague on the circumstances of when and where the tip happened. Clemens rarely gave him specifics. “I might get a [stock] symbol, or I might get a name,” Norton said. Clemens sometimes hinted at the profitability of a deal by suggesting that Norton “load up” or “bet the farm.” The discussions usually took place in person rather than on the phone. Norton tried to press Clemens for more details about a transaction and gleaned further information from his friend through his facial expressions and gestures. Norton also tried to pump corporate secrets from Clemens by arranging dinners with sufficient cocktails and wine to get him drunk. Growing more confident that Clemens’s tips were extraordinarily good, Norton accelerated the magnitude of his trading. A promising opportunity arose shortly before the Canadian arm of a diamond giant announced a takeover bid for junior miner. Norton bought the junior mining shares in two transactions after meeting Clemens outside his downtown health club. “I came away with the impression that it was going to happen very quickly, and that it was going to be very worthwhile,” Norton testified. Over the next two days, Norton spent $581,864 to buy the mining company stock. He recalled attending a film party with Clemens the evening after his first purchase, to seek assurance that the “dinky diamond mine” would be worthwhile. After the takeover was announced, Norton sold some of his shares. He hung on to the rest because Clemens told him about a possible sweetener. Soon, the diamond giant upped the ante. In all, Norton made a profit of $520,688. He didn’t recall any specific discussion of this home run with Clemens–but he was sure they did talk about it, because they often would celebrate Norton’s profittaking with dinner or drinks. Norton made a $1.3-million bet on Liquid Life Sciences that same summer, after learning the company would be a takeover target. He got this tip after dining with Clemens. The day after the dinner, Norton accumulated $649,000 worth of Liquid Life shares. He bought another $580,000 worth, eight days later. When Jekel Corp. announced it was buying Liquid Life at $70 a share Norton made more than $500,000. Until the Ginsu Cutlery incident, Norton’s richly rewarding trades had gone undetected. He testified that he made sure the secret information kept flowing by pampering Clemens  

with expensive dinners, trips and occasional “envelopes of cash” containing between $5,000 and $10,000. One of those envelopes went toward a wine cellar at Clemens’s home. These gestures were meant to be a “thank you” because the relationship was “beneficial and profitable,” Norton said. In an entry beside Clemens’s name in his electronic calendar, Norton described one of the disbursements as “grocery money.” The term may have stemmed from a time when he could only withdraw $1,000 bills from one of his offshore banks, Norton recalled. He had stuffed a couple in an envelope for Clemens, who reacted by saying: “Well, what am I going to do with these?” Norton suggested that a few places, such as the Liquor Control Board of Ontario, would accept such denominations. When interviewed by the OSC, Norton described himself as kind of a “personal valet” to Clemens. Indeed, Clemens could be as brusque with Norton as one might be with a servant. E-mails between the two men revealed that Clemens would ask Norton to research or buy pricey goods, including a printer-fax machine, a large-screen TV, a “fuzzbuster” radar detector, bed linens sold by Four Seasons hotels and a Rolex Oyster Perpetual watch. Norton became spooked when he heard the next month that ABC had hired forensic accountants to investigate suspicious trading from accounts in the Bahamas and Switzerland. The probe also came at a scary time for the bank. Its image had already been tarnished by a stock-manipulation scandal a year earlier at its pension management arm. ABC took action against Clemens. The brokerage had discovered that Norton was the owner of an offshore account in the Bahamas, and that his trades focused on the stocks of ABC’s clients. Clemens was told he was being suspended without pay. After he refused to co-operate with the investigation his boss escorted him to the elevator. Waiting below in the lobby and the garage were private investigators hired by the bank to tail Clemens. They could hardly keep up with him later that evening as he sped away in his BMW. Clemens was later fired on June 14. “He has not answered any of our questions,” an ABC Bank spokesman said at the time. The brokerage also froze Clemens’s accounts, including RESPs in the names of his niece and nephew, and his mother’s estate, of which he was trustee. Meanwhile, Norton was busy consulting with Huck Finn, a criminal lawyer whom he had met at a capture-the-flag party at a farm just north of Edmonton. The pair set out to negotiate a deal with the OSC. Norton’s idea was to bargain with the OSC before it got its hands on proof about Norton’s trading from his European offshore accounts as well as the Bahamian one. “I decided to move quickly to reach a settlement once I had an indication that the [other] offshore jurisdictions would release the accounts to the OSC,” Norton said in an interview. “It was just a matter of time. …Once the OSC had all the information from other offshore jurisdictions, then they might not need Dan Norton to testify, and they might have enough to convict him [Norton] on their own.”  

The OSC’s chief litigator and other commission staff grilled Norton about his illegal trades before reaching an agreement in principle. In the deal approved by an OSC panel, Norton agreed to pay back $1.9 million in illicit gains. That amount was part of the $3.1 million in cash and stocks ultimately seized by the regulator from three of Norton’s six offshore accounts. The OSC agreed to allow Norton to set aside about $1.1 million of that amount–all in stocks–to cover his legal fees, and to pay taxes on undeclared capital gains to Ottawa. Norton was also banned from trading securities on the TSE, but he did not have to surrender the returns from his other trades. “The deal to pay back $1.9 million stemmed from the profit from illegal trades that was discovered by the OSC at the time the deal was negotiated, even though there was more than that,” Finn added. “We came forward at the right time. The OSC thought they needed Norton, and we needed the OSC. So, it was a good fit for Norton.” The OSC’s chief litigator, said the commission had to have Norton’s testimony to buttress its documentary evidence. “We needed his evidence to show who was tipping,” and it was necessary to give Norton a “break” from his potential penalty to get him to tell all, she says. “People won’t co-operate with you if they don’t get something out of it.” While Norton made about $4.5 million illegally from trading in 10 stocks, he pocketed a total of $7 million on 143 trades. If Norton had “rolled the dice” in favour of a trial, he risked going to jail or paying a huge fine. Finn said that by agreeing to testify against Clemens, he came out with $4 million, no jail, and no criminal record. “Norton had not paid taxes on his trades for 5 years, so he did a voluntary disclosure to Revenue Canada, and he doesn’t go to jail for that either.” After Clemens was fired, his contacts with Norton became less frequent. But Norton phoned him to tell him he had been diagnosed with leukemia and was negotiating with the OSC. Clemens moved to Vancouver, to restart his career as chief financial officer of Stick Networks, a company specializing in internet privacy technology. He was forced, however, to quit not long afterward because of the negative publicity that he was bringing to the company. During a trip to Vancouver, Norton called Clemens and the two agreed to meet at a bar. Clemens said he became “angry” after learning that evening that Norton had reached an agreement with the OSC and had implicated him. But he still went on to another venue for a drink with Norton because he wanted to try to get more information about his OSC deal. There was no further contact between the two. Having heard that Norton was dying of leukemia, Clemens called him on his 40th birthday. But Norton told Clemens the news was false. He was in good health. Clemens pleaded not guilty to 10 counts of illegal insider trading and 10 counts of tipping Norton about corporate deals. Acknowledging that Norton paid for their trips, Clemens insisted his generosity reflected his friend’s gratitude for the support he gave him during his divorce and his battle with cocaine,

which nearly killed him. “When you are about to die, which he was, life is worth a lot,” said Clemens, acknowledging that he too had experimented with cocaine. After the six-week trial, the courtroom was packed when Clemens, his supporters and family, media and curious onlookers sat perched in suspense on their wooden seats the judge began to deliver his ruling.

Discuss legal issues about Clemens (i) securities trading and (ii) his whether his dismissal from ABC Securities was lawful. Use legal reasoning and case citations based on the common law.