On Aug. 3, 2009, a single-engine Cessna 206 float plane took off from Ontario’s Lake Muskoka, the epicentre of Toronto’s prestige cottage country. It rose erratically before shaving tree tops, flipping, and bursting into flames. The two passengers—pilot Jack Lawrence and his companion, Carol Richardson, were killed instantly. News of the crash reverberated through the Canadian business old guard. Lawrence, a vital 75-year-old, was one of those Runyonesque Bay Street legends, the type not seen so much since the banks began buying up brokerages. Lawrence had made his name as an aggressive bond trader, then as the architect who built tiny broker Burns & Co. into power player Burns Fry; as its chairman, he sold the firm to the Bank of Montreal in 1994 for $400 million plus. Lawrence lingered at BMO as an éminence grise for a time but his competitive, combative nature wasn’t suited to the corporate corral. In 1996, he founded Lawrence & Company Inc., an investment and venture capital firm.
As the polite tributes poured in honouring Lawrence’s legacy—as a mentor to many, as the co-founder of Toronto’s Cambridge Club and an outspoken voice on national issues—more vitriolic murmurs were being vented in the salons and squash courts frequented by Toronto society. The topic: the fallout from Lawrence’s ill-fated hedge fund, Lawrence Partners, run by Lawrence & Co. subsidiary Lawrence Asset Management, or LAM. The fund, which went public in 2005 with a $25,000 investment minimum, attracted more than 1,000 investors, among them many prominent Canadians.
What drew them was the prospect of running with the big dogs, the notion of benefiting from Lawrence’s street cred, the lure of being on the inside. That, and the fund’s unbelievable returns—75 per cent in 2006, 21 per cent in 2007—finessed by thirtysomething manager Ravi Sood, a Lawrence protege who was hyped as the next big thing. One investor recalls Sood being touted as “the next Eric Sprott,” a reference to the Toronto fund manager known for stellar long-term returns. Monty Gordon, a Bay Street veteran, was an investor and rainmaker, bringing friends into the fold, for a commission. Robin Korthals, a former CEO of the Toronto-Dominion Bank, bought shares. So did the author (and former Maclean’s editor-in-chief) Peter C. Newman.
Then came September 2008; investors watched in horror as 81 per cent of the fund’s value evaporated in weeks. Their anger mounted when redemptions were frozen in November, pending restructuring. One investor recalls trying to get out earlier: “I didn’t like what was going on and tried to redeem, only to have the door slammed in my face,” he says. Tales of ruination made the rounds: one man reportedly lost $13 million, a widow of a well-known businessman was said to be destitute.
“I consider myself lucky because I didn’t have the kitchen sink in there,” says Nicholas Sayce, a Toronto investor relations consultant. “I would have been better giving it to a homeless person, the way things ended up.” So acute was the bitterness that some conjectured the gas tank of Lawrence’s Cessna had been sugared, and even more wildly, that the experienced pilot had staged his own death. “A lot of people, good people, lost a lot of money and they won’t say anything,” says Newman. “It’s so damned Canadian.”
Newman isn’t one to be quiet. He came to the fund flush with the first real money he says he ever amassed, the royalties from his Mulroney biography and his own autobiography. A neighbour who’d invested talked it up. Newman knew Lawrence and called him. “He told me he was in it too, and that if there were any problems, he’d help me out, whatever that meant,” he says. Newman’s wife, Alvy, says that when they met with Sood and Lawrence, she pressed for assurances that their principal was safe. “[Lawrence] said, ‘If the market goes down, that’s when we’ll really sing.’ ”
That was the extent of their due diligence. Newman says he took “hedge fund” literally: “My understanding of hedge was the name—you’re protected going up or going down,” he says. It’s a surprising mistake given the number of high-profile hedge fund scandals and implosions in the past decade. As it happens, “hedge” is just another of those semantical stock market prevarications, along with the upbeat “correction,” which means “decline,” and the responsible-sounding “leverage,” rich-person-speak for assuming massive debt. Hedge funds don’t file prospectuses with securities regulators; instead, investors must sign an “accredited investor exemption,” which declares they meet certain financial requirements. These vary, but a net worth of $1 million or a $300,000 income for two years will usually get you in the door. Hedge fund managers are also given more freedom in accounting, and have more tools and strategies in their arsenal, which usually feature high-risk derivatives, short selling, and buying stock on margin. Looser rules, obviously, have at times provided ripe petri dishes for fraud (see Bernie Madoff). Hedge funds were once like cosmetic surgery: exclusive to the rich, requiring at least $1 million to invest. Now, owning a house in Toronto makes most people eligible as “accredited investors.”
Still, seasoned investors like Korthals, once a commissioner with the Ontario Securities Commission, see hedge funds as legitimate investment tools—and the quickest route to wealth. He lost money in the Lawrence Partners fund, but maintains that a diversified hedge fund portfolio provides higher returns than mutual funds over the long haul. “A lot of the best analysts have gone into hedge funds,” he says. “So if you want to have them manage your money, you have to do that.”
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