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Brokerage sues trio of Bay Street players

A Texas-based brokerage house is suing a trio of high-profile Bay Street players for $41-million each, alleging a stock-trading conspiracy that brought down investment dealer Evergreen Capital Partners Inc. last year.

David Connacher and Lorne Burnett, both scions of prominent Toronto families, and hedge fund manager Brendan Kyne are being sued by Penson Financial Services Canada Inc. for what court documents allege was a "pattern of improper and fraudulent trading."

Penson Canada, a unit of Dallas-based Penson Worldwide Inc., did all of Evergreen's back-office work and was left with a $33-million loss after Evergreen failed in October. Also being sued is Burnac Corp., the Burnett family's holding company.

The documents allege Mr. Connacher awarded money-making trades to his two friends, leaving the dealer with money-losing positions.

None of the claims have been proven in court. Nor have the individuals and companies named by Penson been served with the lawsuit.

Burnac said it and Mr. Burnett would fight the suit, if they are served. "We are a victim here," Burnac president Ted Burnett said.

Mr. Connacher declined to comment, and Mr. Kyne could not be reached.

Penson filed the claim last month, and executives at the dealer mentioned it Monday during a conference call with analysts.

Penson alleges Mr. Connacher, Evergreen's former head trader, used the dealer's capital to take positions for accounts controlled by Mr. Burnett and Mr. Kyne, who Penson said are "long-time, close friends."

Mr. Burnett's account with Toronto-based Evergreen came through Burnac, which was created by his father, real estate developer Joey Burnett.

Mr. Kyne, who was Mr. Connacher's next-door neighbour for three years, traded through a money manager he runs named Leeward Hedge Funds Inc.

"Leeward and Burnac had the benefit of essentially speculating at Evergreen's (and ultimately Penson's) expense by withholding approval or disapproval of trades until the market took a turn for the better or worse and then assuming the more profitable position," said Penson's statement of claim in the Ontario Superior Court of Justice.

Burnac "never did much trading with Evergreen," said Ted Burnett, who is also the company's in-house legal counsel. He added that on two occasions, company executives called Evergreen to point out that stocks Burnac didn't own had shown up in its account, and each time, Evergreen "explained there had been a clerical error, and removed the shares."

Penson alleges in the documents there was a "conspiracy" between the three friends, with Mr. Connacher allegedly motivated in part by commissions he earned on trades. Mr. Connacher, son of legendary Gordon Capital chief executive officer Jimmy Connacher, joined Evergreen in March, 2008.

"Kyne would sometimes instruct Connacher on the exact amount of a win (i.e., trading profit) that he required," Penson alleged in the filing, pointing to one request from Mr. Kyne for a $61,000 profit that resulted in a series of trades over the next four days that earned Leeward a total of $62,160.

Penson alleged "Connacher awarded favourable pricing anomalies to Leeward that were conversely detrimental to Evergreen."

Penson also claimed the alleged scheme unravelled last fall, when the stock market began to tank. Evergreen owned $74-million of positions that Penson said were being held for Mr. Kyne and Mr. Burnett. In its lawsuit, Penson says: "Leeward and Burnac refused to settle these trades when the value of accumulated securities declined quite substantially in October, 2008. Consequently, Evergreen was left holding the losing positions."

When Evergreen liquidated these holdings in late October, at Penson's request, it was left with a $33-million loss. Evergreen went to regulators with its woes and announced it was shutting down on Oct. 29, 2008, and the dealer was put into bankruptcy in December.

Penson is now suing each of the three men for $33-million in losses, along with $8-million in "special and exemplary" damages. Penson is also suing Burnac, Leeward and one other hedge fund controlled by Mr. Kyne, all for the same amount.

Penson also wants all trading profits refunded by the funds and to claw back any salary and bonuses that Mr. Connacher was paid as a result of what it called "fraudulent trades and unlawful conspiracy."